Similarly to how you did the sales forecast for 3 years, you’ll now create and add your expenses for 3 years. Develop a detailed and realistic forecast of all business expenses over the next three years, integrating these figures into your pro forma income statements to complete the financial outlook of your business idea.
Instructions:
Expense Identification and Categorization:
List Expected Expenses:
Itemize all potential expenses you will incur in the operation of your business. Look at the income statement template for frequent expenses businesses tend to incur.
Ensure you are comprehensive and consider all facets of your business operations.
Do research on the expenses in your industry.
Year 1 Expense Estimation:
Conduct Initial Research:
Utilize a variety of sources such as industry reports, quotes from suppliers, or financial statements from similar businesses to estimate the costs for each expense in the first year.
If you are a retail business or a food and beverages establishment you will have direct costs which are your costs of goods sold. This is usually a percentage of your sales. Research what this is for your type of business (if applicable).
Document all sources of your information for transparency and future reference in your assumptions tab.
3. Document and Calculate Year 1 Expenses:
Input all researched costs into a spreadsheet or financial software, clearly categorizing each expense.
Ensure that each expense is realistic and justifiable based on your business size, industry, and location.
Expenses Projection for Years 2 and 3:
Estimate Growth and Adjustments:
Apply an industry-standard growth rate to project how each expense might increase in Years 2 and 3. Consider the general inflation rate, changes in market prices, and any anticipated expansion of your business.
Make adjustments for known future changes in your business, such as planned expansion, contractual changes in rent, or scaling of operations.
Ensure Realism and Alignment:
Cross-verify the projected expenses with the expected revenue and business growth. Ensure that your expense growth is in line with revenue projections and industry standards.
Adjust any figures that seem disproportionate or unrealistic compared to industry benchmarks or business growth plans.
Compiling and Reviewing Pro Forma Statements:
Integrate Expenses into Pro Forma Income Statement:
Add the detailed expenses forecast to your pro forma income statement alongside the sales and revenue figures.
Review the complete statement to ensure that all expenses are accounted for and that the document is easy to understand.
Review and Revise:
Double-check all figures for accuracy and realism. Consider seeking feedback from a financial advisor or mentor with experience in financial planning and analysis.
Make any necessary revisions to ensure the projections are as accurate and realistic as possible.
Assumptions and Documentation:
Document Assumptions:
In the separate tab for assumptions, clearly document all assumptions made during the expense forecasting process.
Include the rationale behind each assumption, the sources of your data, and any calculations used.
Submission:
Submit Completed Pro Forma Income Statements:
Ensure that your final submission includes a comprehensive and well-organized pro forma income statement for the next three years.
Attach the documentation of assumptions and ensure that all parts of the assignment are clearly labeled and easy to navigate.
Reminder: Accurate and realistic expense forecasting is crucial for creating a viable business strategy and securing funding or investment. Dedicate sufficient time to research, calculate, and review your projections to ensure they reflect a true picture of your business’s potential financial health.
