Question

What is the step by step procedure to complete a forecast analysis from an income statement? How do you predict % of increase in revenue using % of sales method?

Answer 1

Sol: Following are the procedures you need to complete a forecast analysis from an income statement:

1)Project the income statement: Use the estimated revenue for each target market group that you determined in the section “Estimating Revenue and Expenses.” Plug in the expenses and operating expenses as well, and use all three to determine your net profit or loss.

2)Project the balance sheet: As sales go up, so do other areas of the business — variable assets (accounts receivable, inventory and equipment), variable liabilities (accounts payable and accrued expenses) and (hopefully) net income. If your net income plus the increase in variable liabilities equals or exceeds the increase in variable assets, the company has the resources to finance itself. If not, you must bring in additional debt or equity. Use your current balance sheet to determine the various asset and liability accounts in your business.

3)Project cash flows: Using the information in Steps 1 and 2, project how these numbers impact your cash flow, paying special attention to how much new debt or equity you need to inject into the business and when to inject it.

The percentage of sales method is a financial forecasting method that businesses use to predict their sales growth on an annual basis. Using the % of sales method you can predict the % of increase in revenue they need to accomplish their goal.You can do this by Cash, Accounts receivable, Inventory, Fixed assets,  Accounts payable, Cost of goods sold & Net income.