Projected Income Statement And Balance Sheet – Forecasting line items on the balance sheet is usually done at the same time as projecting line items on the income statement. Both skills are necessary when mastering the art of financial modeling. This guide breaks down step-by-step how to calculate and then forecast each line item needed to forecast a full balance sheet and build a 3-statement financial model.
Accounts receivable, inventory, and payables are unique because they have specific valuation methods. Since all these accounts are involved in the operating and cash cycle, it is useful to forecast the “due date” for all these accounts. Using the days outstanding formula, we can forecast future receivables, inventory, and accounts payable.
Projected Income Statement And Balance Sheet
Once we find the historical value for days outstanding, we can use this trend and reverse the days outstanding formula to find accounts receivable, inventory, or payables for that particular period.
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Let’s take the example of receivables. In the previous year, accounts receivable were 120. If sales revenue was $100,000 for the year, then accounts receivable is found by:
We can forecast other current assets as separate items or separate them as separate items. The projection of balance sheet positions using the latter method is more extensive, but will allow more detail and dynamics in the model.
A quick and dirty way to visualize balance sheet line items for current assets is to simply use a forecast of the dollar value of the entire account in the future or follow existing trends.
Projecting PP&E differs from projecting current assets and other long-term assets. This forecast requires the creation of an amortization schedule for each class of PP&E. The balance shown in the balance sheet is the ending balance.
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As you can see, using an amortization schedule is tied to the balance sheet and income statement. We use the ending balance on the balance sheet and depreciation expense on the income statement.
Like PP&E with an amortization schedule, long-term debt is valued using a debt schedule. This schedule describes each class of debt and sets the interest charges for each period. The balance shown on the balance sheet is also the ending balance of the long-term debt or the sum of all the ending balances of the individual debts.
It is important to note that here the interest charges are added back to the opening balance. In contrast, depreciation expense is deducted from the opening balance in PP&E. Keep this in mind and be sure to use the appropriate characters.
Equity can be one of the easiest tasks when illustrating balance sheet line items. More often than not, stockholders’ equity remains constant throughout the period, so the forecast will usually be equal to the most recent known period.
Projected Income: Example & Explanation
Retained earnings estimates actually include estimates of net income and dividends, not retained earnings itself. This means that in order to complete the balance sheet line item projection, it is necessary to first complete the income statement line item projection so that net income is available. As always, the balance shown on the balance sheet is the ending balance.
Since we need specific items from the income statement, this is the best way to visualize the balance sheet items:
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Projected income is an estimate of the financial results you will see from your business in the future. It is often presented in the form of an income statement, but does not have to be.
Income Statement Projection
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For example, you are a small business owner and you are considering expanding into a gadget business. You have decided to create a forecasted income statement for next year to see if the new product is profitable.
The first item to evaluate is revenue, also known as customer sales. You believe you can sell 1,000 widgets at an average price of $50 each, so your expected revenue is $50,000.
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Next, you need to estimate the cost of goods sold. These are the costs of buying or manufacturing gadgets. In this case, you have found a supplier who will sell you $1,500 for 100 widgets, or $15 each. So your estimated cost of goods sold for the 1,000 gadgets you expect to sell would be 1,000 * $15 = $15,000.
Gross profit is simply profit – the cost of goods sold. So in this case, $50,000 – $15,000, which is $35,000.
Next, you need to estimate the additional operating costs you will incur by offering this product. You must pay the seller a ten percent commission on the sale of your widget, which is five dollars each. For expected sales of 1,000, that would be $5,000 for the year.
In addition, you expect to spend $500 per month on brochures and $1,500 per month on additional office expenses such as office supplies, telephones, and other items. Operating expenses are usually presented in many categories, so your projected operating expenses will:
Income Statement Template
Finally, we can estimate the net income. For the accountants reading this – we’ll assume we don’t need a loan to grow this new business and ignore the impact of taxes, so our example is simple. Net income is gross profit of $35,000 minus operating expenses of $29,000 = $6,000 for the year.
Now that you’ve combined the profits and expenses of this venture, it’s time to create a projected income statement. Here are the final projections in standard income statement format:
With this information, we can now decide if we want to add this product to our offer for next year.
In this example, we create a forecasted income statement to decide whether to launch a new product for next year. Other reasons we may do include:
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Let’s take a look. Projected income is an estimate of the financial results you will see from your business in the future. It is often presented in the form of a profit and loss statement. To create a projected income statement, it’s important to consider profit, cost of goods sold, gross profit, and operating expenses. Using the equation gross profit – operating expenses = net income, you can estimate your projected income.
Calculating projected income involves calculating net income, which is gross profit minus operating expenses. This can be shown in the form of a profit and loss statement. Your income statement will include total revenue, cost of goods sold, gross profit, and operating expenses.
Forecasted income statements can be used to prepare annual budgets or create long-term business plans.
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Analysis Of Financial Statements
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