Financial Projection Assumptions

The financial projections template requires a number of key business plan assumptions. Some of these financial projection assumptions such as the interest rate, and income tax rate are specific to the particular circumstances of the business, however others, such as those listed below, can be estimated using the published financial statements of other businesses.

 

 

  1. Gross margin %
  2. Accounts receivable days
  3. Inventory days
  4. Accounts payable days
  5. Other liabilities days

Which Financial Statements to Use

If your business is an established one, then your own historical financial statements can be used as the basis for identifying the financial projection assumptions to be used. However, if you are a startup business and historical information is not available, financial statements of other businesses are available from a number of sources, including the investor pages of the company’s website, or from sources such as Edgar in the US, or Companies House in the UK.

When choosing financial statements to work from, the first point to note is that they must be from a similar industry to your own. For example, if you are a high volume, low margin retail business there is little value in analyzing the financial statements of a low volume, high margin manufacturing business, as the results will not be comparable.

The second point is that ideally the financial statements should be from a business of similar size to your own, or the size you intend it to be over the period of the financial projections. Unfortunately, financial statements for small startup businesses tend not to be available to the general public, so of necessity, information from much larger listed businesses might have to be used. While this is not ideal, it can provide useful initial estimates of key assumptions, which can then be adjusted to allow for the difference in scale.

Calculation of Financial Projection Assumptions Example

The calculation of each of the key financial projection assumptions is shown below using the financial statements of Apple Inc as an example.

Throughout the calculations, it is assumed that the accounting period is for a year, and the number of days is set at 365. If the financial statements are for a different number of days, then this number should be used instead. In addition, in order to avoid the results being distorted by one off events, if a number of years financial statements are available, calculate the values for each of the years and then take an average value.

Gross margin %

The gross margin percentage is calculated using the following formula.

Gross margin % = (Revenue – Cost of sales) / Revenue

For example using the Apple Inc income statement for 2013, the gross margin percentage is calculated as follows:

Gross margin % = (Revenue - Cost of sales) / Revenue
Gross margin % = 64,304 / 170,910
Gross margin % = 37.6%

Accounts Receivable Days

The accounts receivable days is calculated using the following formula.

Accounts receivable days = Accounts receivable / (Revenue / 365)

The formula basically takes the accounts receivable (amount outstanding from customers), and divides this by the daily revenue, to give an indication of how long it takes customers to pay their accounts.

For example using the Apple income statement 2013 for revenue, and the Apple Inc. balance sheet 2013 for accounts receivable, the accounts receivable days is calculated as follows:

Accounts receivable days = Accounts receivable / (Revenue / 365)
Accounts receivable days = 13,102 / (170,910 / 365)
Accounts receivable days = 28 days

Our accounts receivable days calculator is available to help perform this calculation.

Inventory Days

The inventory days is calculated using the following formula.

Inventory days = Inventory / (Cost of sales / 365)

The formula simply takes the inventory, and divides this by the daily cost of sales, to give an indication of how many days cost of sales are held inventory. Using the Apple Inc. income statement 2013 for cost of sales, and the Apple Inc. balance sheet 2013 for inventory, the inventory days is calculated as follows:

Inventory days = Inventory / (Cost of sales / 365)
Inventory days = 1,764 / (106,606 / 365)
Inventory days = 6 days

Our inventory days calculator is available to help perform this calculation.

Accounts Payable Days

The accounts payable days is calculated using the following formula.

Accounts payable days = Accounts payable / (Cost of sales / 365)

The formula uses the accounts payable (amount outstanding to trade suppliers) from the balance sheet, and divides this by the daily cost of sales from the income statement, to give an indication of how long it takes fro the business to pay its suppliers.

For example using the Apple Inc. income statement 2013, and the Apple Inc. balance sheet 2013 the accounts payable days is calculated as follows:

Accounts payable days = Accounts payable / (Cost of sales / 365)
Accounts payable days = 22,367 / (106,606 / 365)
Accounts payable days = 77 days

Our accounts payable days calculator is available to help perform this calculation.

Other Liabilities Days

The other liabilities days is calculated using the formula below.

Other liabilities days = Other liabilities / ((Operating expenses + Finance costs + Income tax) / 365)

The formula basically uses the other liabilities figure, and divides this by the daily expenses (other than cost of sales), to give an indication of how long it takes to pay other liabilities.

Again, using the Apple Inc. income statement 2013, for operating expenses, interest costs (nil), and income tax, and the Apple Inc. balance sheet 2013 for other liabilities (accrued expenses), then the other liabilities days can be calculated as follows:

Other liabilities days = Other liabilities / (Operating expenses + Finance costs + Income tax / 365)
Other liabilities days = 13,856 / ((15,305 + 0 + 13,118) / 365)
Other liabilities days = 178 days

Our other liabilities days calculator is available to help perform this calculation.

The process should be repeated with as many sets of financial statements as you have available, both for different companies in your industry and for different years. Eventually a pattern will form which will give you a good indication of the type of values you should be considering for these key financial projection assumptions.

The financial assumptions discussed above can be estimated from the published financial statements of other businesses. Other assumptions a startup needs to consider are listed in our post on business plan assumptions.

Last modified July 16th, 2019 by Michael Brown

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.

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