The above-mentioned 24-month financial projections are predicated on a series of hypotheses intended to protect the business’s success in the upcoming fiscal years. These presumptions have to consider a range of internal and external elements that might impact the business’s growth, profitability, and general financial well-being (Tarigan et al., 2022). It is important to remember that projections are uncertain and might diverge from actual outcomes due to shifting market conditions and unforeseen events (Seyam & Brickman, 2016). Our forecasts include a conservative 20% revenue growth in Year 2 over Year 1, one of the major assumptions. This projected rise is predicated on the anticipation of business expansion and market penetration. Additionally, the assumption accounts for the likelihood of higher customer demand and more intensive marketing efforts to boost sales.
According to the projections, COGS will remain at 60% of sales in Years 1 and 2. This presumption is predicated on the business’s capacity to keep operating efficiency and production costs constant. The gross profit is calculated after subtracting the cost of items sold from the anticipated sales. It is assumed that the gross profit margin will remain stable, which shows how much money the business may make after subtracting direct production costs. Nonetheless, it is important to consistently track the COGS since any unanticipated variations might impact overall profitability.
In Year 2, it is anticipated that the firm will incur 10% more in selling expenses. Planned marketing activities like sales promotions, advertising campaigns, and hiring more salespeople are to blame for this surge. The company believes that these initiatives will result from increased brand awareness and customer acquisition. The projections for Year 2 call for increased administrative spending of 12.5%. The business is growing and requires more infrastructure, office space, and administrative staff. It is anticipated that these expenses will be well managed and that the overall cost structure of the business will be maximized.
The overall operational expense is the sum of sales and administrative costs. The assumption is that the firm would manage its operational expenditures efficiently and in line with planned revenue growth. This is computed by deducting total operating expenditures from gross profit. The assumption is that the company’s activities will be successful and that smart cost management will contribute to a healthy operating income. The predictions include revenue from non-operational sources such as interest and rental income. The expectation is that the corporation will have a variety of revenue streams that will offer stability and support its primary business operations.
Earnings before Tax and Interest (EBIT) is the total of operating income and other income. The company’s various revenue streams will benefit its overall financial performance. The company’s interest expenditures are expected to fall modestly in Year 2 due to fewer outstanding obligations. This indicates the company’s efforts to manage its financial responsibilities and cut borrowing expenses properly. This is determined by deducting the other expenditure (interest) from the income before taxes and interest. The assumption is that the organization will continue to earn money while adhering to appropriate financial management practices.
For both years, the forecasts assume a 30% effective tax rate. This rate is applied to the income before taxes and interest to compute the income tax expenditure. The actual tax rate may differ depending on the tax legislation and incentives in the company’s jurisdiction. The net income is the outcome after subtracting the income tax expenditure from the pre-tax income. The assumption is that after accounting for tax payments, the firm can retain considerable earnings.
Finally, the financial estimates for the next 24 months are based on reasonable and cautious assumptions. It, too, gives a view into the company’s predicted financial success, taking into account elements such as sales growth, cost control, and other income streams. However, these estimates must be treated cautiously, reviewed, and updated regularly, depending on actual performance and changing market conditions. Financial predictions are useful for corporate planning but should always be regarded as guidelines rather than final results.
References
Tarigan, A., Ramadhani, I. F., & Muda, I. (2022). Principles and Assumptions in Financial Reporting Based on IFRS. Journal of Positive School Psychology, 6(3), 2333-2342.
Seyam, A. A., & Brickman, S. (2016). The going concern is assumptions and presentation on financial statements. The Business & Management Review, 7(3), 241.
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