Let us begin by examining the P&L –
The P&L has two sides: revenue and expenses. Sales and additional income can be found on the revenue side, while all costs incurred throughout the year are tracked on the expense side.
Creating assumptions around expenses is fairly straightforward; all of these figures are computed as a percent of total income or net sales. With revenues, however, the analysis is far more intricate. You can use growth rate calculations or take a more in-depth approach and construct a revenue model.
Let us focus on two methods. We can begin by examining the growth rate method of revenue forecasting in the primary model we are using, then employ a helper model to construct a revenue model.
We could explore a potential revenue model and the number of days for receivables in the following chapter.
I am now creating an additional part in the assumptions document to include P&L figures. To arrive at a better understanding, this is the present condition of my assumptions sheet.
In the P&L assumptions section, I’ll go through each line item one-by-one, in the same sequence it’s listed.
Earlier, I took into account the rate of increase for net sales. Similarly, for the other line items, their values are expressed as a percentage of the sales figure. For instance, other earnings make up a proportion of net sales; likewise, an increase in inventory is given as a fraction of net sales.
Let us kick off with the Net sales growth rate; as before, this is worked out in the same fashion as calculating the deferred taxes growth rate from our prior chapter. Here is a snapshot of the Net sales growth rate –
81.83% is a sizable figure, however it’s based on the firm’s net sales for Y1 and Y2. To further check its accuracy, one can look into how the other organisations in this field performed during the same timeframe.
If a firm in any sector produces remarkable results for a given year, its peers would likely also have achieved similar outcomes. For instance, if MRF has seen a 20% rise in revenue for Y1, one should assume Apolo Tyres will similarly disclose a 20% increase. Nevertheless, if Apollo’s report shows 16%, then it’s clear that MRF has the upper hand on other competitors.
This is just a rough illustration, meant to give you an idea of how one can go about constructing the model for companies.
I’ll move forward with the P&L assumptions. Shouldn’t be too complicated, considering that we already applied this process to the balance sheet figures.
For your convenience, I’ve highlighted the Year 6 cell in the net sales excel sheet, so you can easily see the values used for subsequent calculations – which are all just simple averages. You’re free to download this excel file and take a closer look at each cell.
The bottom of the P&L reveals Depreciation & Amortization and interest expenses. These figures come from the schedules that will be made in the future.
The assumption sheet has been finished, and this is its present state.
*All subscription pricing plans mentioned across the website are exclusive of 18% GST
By signing up, you agree to receive transactional messages on WhatsApp. You may also receive a call from a BP Wealth representative to help you with the account opening process
Disclosures and Disclaimer: Investment in securities markets are subject to market risks; please read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Past performance is not indicative of future results. Details provided in the above newsletter are for educational purposes and should not be construed as investment advice by BP Equities Pvt. Ltd. Investors should consult their investment advisor before making any investment decision. BP Equities Pvt Ltd – SEBI Regn No: INZ000176539 (BSE/NSE), IN-DP-CDSL-183-2002 (CDSL), INH000000974 (Research Analyst), CIN: U45200MH1994PTC081564. Please ensure you carefully read the Risk Disclosure Document as prescribed by SEBI | ICF
Attention Investors
Issued in the interest of Investors
Communications: When You use the Website or send emails or other data, information or communication to us, You agree and understand that You are communicating with Us through electronic records and You consent to receive communications via electronic records from Us periodically and as and when required. We may communicate with you by email or by such other mode of communication, electronic or otherwise.
Investor Alert:
BP Equities Pvt Ltd – SEBI Regn No: INZ000176539 (BSE/NSE), INZ000030431 (MCX/NCDEX), IN-DP-CDSL-183-2002 (CDSL),
INH000000974 (Research Analyst) CIN: U45200MH1994PTC081564
BP Comtrade Pvt Ltd – SEBI Regn No: INZ000030431 CIN: U45200MH1994PTC081564
For complaints, send email on investor@bpwealth.com
You’ll be directed to your subscription plan
