Projection of Income – (updated on 3-16-2013)
By Roger Schlueter, MBA
The Projection of Income or Earnings is a Projection (Educated Guess – based on Fact), that uses Sales and Expenses to arrive at the Net Income or Net Earnings for a period of Time. I usually do my Projection of Income and Expenses for three years. The Projection of Income and expenses should be done differently for a Start – Up Business than an existing (already in business) Business. Both the Start – Up Business and the Existing Business will project Sales and Expenses, and Provide Assumptions, that is explain how you came up with these numbers.
The Start – Up Business is harder to project because the Start – Up Business does not have any existing numbers for Sales and Expenses, so it will have to Project these numbers and include a basis (Assumptions) for the estimates. The Expenses are usually, what they are – they are easily estimated after checking with suppliers. Sales can be tricky – and lets face it, sometimes it is a sheer guess. The Bank and SBA would like that guess to be an educated guess. There are several easy ways to project Sales: 1) Ask several companies in the same industry, 2) Ask the Associations that the Companies are part of, 3) You can estimate by looking at Populations, Age Groups, or Companies that use your product and estimate what percent of market share that you think you can get.
The Existing Company has many Advantages in the projection of Sales and Expenses. They already have an amount of Sales and Expenses per reporting period. It is easier to say that you will increase the percentage if you already have a number. The Trick is to remember to explain and justify your numbers and how you came up with the numbers. The expenses are the easiest because you already have some numbers and they can be equated to Sales as a percentage of Sales. This works best if the past, Months or Years numbers are consistently a certain percent of Sales. RMA has a publication and online presence, where you can look at the averages of Expenses of Companies in your Industry or NAICS Code. This is good to see if your company is within the Average up or down for your particular industry. This publication can be found in most large Metro Libraries (the online version is not free).
The Projected Profit and Loss Statement. This is what the statement should look like. The Explanations should be listed on the same page as the Statement. Look at this example:
Sales $100,000
– COGS* $ 50,000
= Gross Profit $ 50,000 $50,000
– Expenses
Rent $12,000
Electric $ 1,200
Postage $ 200
Office Supplies $ 300
Interest $ 800
Other $ 500
Total Expenses $15,000 – $15,000
Net Profit $35,000
* COGS is Cost of Goods Sold, which is the cost of resold merchandise or the cost to do a service or build a product. The Assumption should really tell the reader what it is made up of. COGS is usually a variable cost and as such will vary with Sales.
Explanations of Sales and Expenses
Sales – Research from other firms my size
COGS – Actual cost estimate from suppliers
Rent – Actual projected cost
Electric – Estimate based on rented facility
Postage – Estimate based on sales
Office Supplies – Estimate based on sales
Interest – Actual based on projected loan
Other – Projected unexpected expense
This is a good example but it is only an example. Your expense will differ and if you have a service business, you probably will not have any Cost of Goods Sold – COGS.
Remember to base your Sales or Income on a fact or methodology. Sales are much harder to estimate than expenses. Your cash available to pay your banks debt service on your loan will depend on enough sales to cover expenses and hopefully have a profit at the end of the month or year. The Projected Income Statement is based on fact but may have much subjectivity on its creation and application.