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Proformas & Annual Reports |
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Page 4 of 5 Income Statement
The income statement is an indispensable tool. Your company can quickly diagnose problems with excess inventory, insufficient profits or excess interest payments. The income statement provides a record of profits and losses by comparing revenues and expenses on a product by product basis.
Sales are reported in dollars (not the number of products). Subtracting variable costs from sales determines the contribution margin, which generally should be 30% or more. Inventory carry costs are driven by the number of products in the warehouse. If your company has $0 inventory carry costs, you stocked out of the product and most likely missed sales opportunities. If your company has excessive inventory, your carry costs will be high. Sound sales forecasts matched to reasonable production schedules will result in a modest inventory carry costs. Remember, the Proforma reports are only as accurate as the Marketing sales forecasts.
Period costs are the sum of deprecation and SG&A costs. Period costs are subtracted from the contribution margin to determine the net margin. SG&A, or Sales, General & Administration costs include R&D, Promotion, Sales and Admin costs.
Depreciation is an accounting principle that allows companies to reduce the value of their fixed assets. Each year some of the value is “used up.” Depreciation decreases the firm’s tax liability by reducing net profits, and provides a more accurate picture of a company’s value. Depreciation is reflected as a gain on the cash flow statement, but is expensed on the income statement. Foundation® uses a straight line depreciation method calculated over fifteen years.
Net profit impacts many of the financial measures associated with business success, including earnings per share, which drives stock price and market capitalization.
You might want to print your proforma income statement after finalizing your decisions, then compare it to the actual results in the annual reports.
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