Article by Roger Schlueter, MBA
You have a Great Idea for a Retail Store. You believe that it will make you Boo-coo Bucks but you need a loan to Open the Store. You need Inventory and Working Capital to open the Store, and you decide to apply for a Commercial Business Loan to launch your business venture. One of the first things out of your Bankers mouth is, “did you do a Projected Income Statement?”.
The Projected Income Statement for a Retail Store is fairly easy if you have Good Sales Figures that are based on Realistic Assumptions and Based on Real Numbers of Some Sort. You Say, “What are Real Assumptions and Real Numbers?”. Well the best Assumptions and Real Numbers are just that, Sales Numbers that are based on a Real Store or the Numbers for Sales of Stores in that industry. You can assume you can sell to many people but the proof is in the pudding. The Best Way to get the Sales Numbers is to find a store in another market area that is not in competition with you and ask them what the Sales Numbers are and if there are any correlations, like Sales per Population or Sales per Type of Customer, Etc.
The Second Best Way to Find Real Numbers is to ask that businesses Association what are the Sales Numbers for a Store of your size in your area and if the Association knows of any Correlations in the Industry that can foretell Sales.
The Third Best Way to Find Real Numbers is to make them up but try to base the Projection on something you know, like the Population of a certain area, the Traffic Count on the road you are located on, or the number of professional people in an area that use your product. Sometimes these Correlations can mean something to the Banker if he believes the Correlation.
The Sales figure is the hardest number in your Income Statement. The next number you need in your Income Statement is the Cost of Goods Sold. This number should be easy to get. It is the Cost of the Items you are going to sell. You probably have a supplier that is providing you with these Items to sell at a wholesale cost so you can in turn sell the items at the Retail Price and make money after you deduct your expenses.
The Sales minus the Cost of Goods Sold or COGS is the Gross Profit. This is the number that has to be Big Enough to absorb you expenses and have some money left over for Profit so you can stay in business.
The Expenses are your expenses of operating and running your business. These are your Rent or Mortgage Payment, Your Electric Cost, Your Insurance of the Inventory and Business Continuation Insurance, any Marketing Cost/Advertising Cost, Accounting and Legal, Supplies, Trash Pick up, and any other Expense of Running your Business. Do not include Depreciation because it is a non-cash charge).
Expenses can be the Real Expenses that you are going to have from the Vendors or you can look these numbers up on a Group that Aggregates the Financial Statements of Businesses in your Industry and Quotes them as Percentages. You just use the Percentage of Sales for your particular industry. This is of Course not as accurate as the real thing but is has worked for some business proposals. S&P has these numbers as well as RMA.
Example:
Sales
-COGS
= Gross Profit
Expenses
-Rent
-Employee Wages
-Advertising and Marketing Expenses
-Electric and/or Gas
-Supplies
-Accounting and Legal
-Trash Pickup
Total Expenses
– Total Expenses
= Net Income Before Taxes
– Loan Payment
= Net Income after Loan Payment but Before Taxes
What you have done is create an Income Statement that can also double as a Business Loan Bank Cash Flow Statement. The Bank is not as interested in the Income Statement as the bank is the Cash Flow Necessary to Pay Debt Service and Provide Capital for the Continuation of the Business.
You can use this Format for many Businesses but remember most Service Businesses do not have a Cost of Goods Sold number.
Remember: what the bank is looking for is a Good Representation of the Real Financial Statement. He will usually want this Projected form for three years. The Increase from year to year is up to you but make sure to make it believable. A believable number is 5% to 20%, depending on your Assumptions and Knowledge of the Industry and the Market for your Product in the Future.
Please email me at roger@rogerschlueter.com if you have any questions or comments or go thru the Blog. My Website also has some Business Info you may use at schlueterfinancial.com Thanks, Roger