Income Statement Analysis
& Reporting
This section includes standard profit and loss income
statement analyses. The line items of the profit and loss statement should
reflect industry practices and the needs of the business.
The Income Statement Analyses include the following:
- Income
Statement Analysis
- Five
Year P&L Forecast
- Analysis
of P&L Expense Items
Income Statement Analysis
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Template for: Income Statement Analysis
This section includes a standard profit and loss income
statement with a few years of history.
The line items of the profit and loss statement should reflect industry
practices and the needs of the business.
Five Year P&L Forecast
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Template for: Five Year P&L Forecast
This section includes a standard five year profit and loss
forecast.
At many companies, financial projections are the strategic plans of the
business. For example, "The plan is to increase revenues and profit by
15%." In some cases the business managers are coached what the answer
should be via corporate hurdle rates.
These 'plans' are often nothing more than the desired financial goals of
management. In fact, the same 'plan' is often used for all corporate businesses.
Simplicity rules. In general, there is a thin line between picking a number out
of the air and the financial plans of the business.
In any case, the CEO is characterized as a demanding leader that will be able
to raise dividends next year and make the shareholders happy. The business
manager will 'work the numbers' until the desired results are discovered. If the
business manager doesn't have a clue how the business will attain the stated
goals, the plan is described as "very aggressive."
The annual ritual continues until the company doesn't make its goals.
However, when based on a previously developed industry analysis and the
firm's competitive strategy, financial projections are fully complementary to
that effort and they link the specific strategy with a set of expected financial
returns for the business.
To ensure the proper linkage between strategy formulation and financial
projections, all financial projections should include a list of assumptions
about the industry, about the firm's competitive strategy, and all other
assumptions.
For cyclical businesses, additional information should be added regarding the
monthly pattern of sales and cash flows and the reasons for the volatility.
The template documents should be customized to meet the needs of the
business. Adding another section to present a monthly, quarterly or annual
budget may be appropriate. If a budget is included, it should correspond with
the P&L statement.
Analysis of P&L Expense Items
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Template for: Analysis of P&L Expense Items
This section analyzes the largest expense items on the profit
and loss statement. The listing on the template web page should be
customized for your business and mirror the P&L statement previously
presented.
Although not every expense item needs to be listed and analyzed, all large or
growing line items should be. To highlight the biggest expenses, list expense
items in descending order by amount.
The discussion of expenses should include, for each expense item, some or
all of the following:
- A definition of the expense, if it is not obvious;
- An explanation of why the expense is what it is;
- The change in expense level from previous years and an indication of
future direction;
- The variance from budget;
- Steps taken or planned to reduce the expense.
Many cost cutting programs are driven by the corporate financial officer
using the P&L statement as (unfortunately) the single source of information
from which to make decisions. For example, cut salary (staff) by 5% across the
board.
In practice, the reason why this not-so-strategic (hack-saw) method works so
well is because many labor intensive activities have become automated and few
companies have had the will and creativity to enter new businesses using the
(newly created) excess staff.
As companies continue to spend millions of dollars investing in new
technology, and as the price performance of technology continues to improve,
this 'strategy' of cutting the innocent will appear to still to 'work'
because success is too often measured in terms of short-term trends in earnings,
rather than measured in terms of relative success vis-à-vis alternative
strategies.
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