Income Statement.

When building our income statement forecasts, we start with the actual figures or historical figures. Here in the first column, we have the actual figures and that's the figures reported by the company for Year 0.

We build these forecasts for all line items, such as revenues, operating costs, and tax, using the assumptions that have been generated from our ratio analysis. However, it's super important to note, that when we are first building the income statement forecasts, we're going to leave interest income and expense blank. This is because we can't calculate this until we've calculated the cash and debt balances, and that happens right at the end of the model. So interest tends to be the last item that we calculate. Generally, when we build our forecasts, we build our calculations just for Year 1, so from revenue all the way down to net income for Year 1, leaving interest blank, of course. And then, once we finished and checked all our Year 1 forecasts and formulas, we copy those formulas across to the right for Years 2, 3, 4, and 5. This is because it allows us to check that our Year 1 forecasts are error-free before we copy across our formulas. If you've made an error in Year 1, which you then copy to the right, then every time you fix an error, you'll need to recopy all your formulas to write again to correct those formulas in all of the other forecast years. So instead, it's much more efficient to run some checks on the numbers before we copy anything across. Firstly, we sense check. We make sure that the forecast makes sense. For example, if revenues have increased between Year 0 and Year 1, but costs have fallen, is this consistent with your assumptions showing that costs have fallen as a percentage of revenue? If not, check your formula. Secondly, we structure check. This means that we review our formulas to make sure that all of the inputs are pulling from the rows and the columns that we expect them to. For example, that Year 1 revenues are linking to the year one assumption for revenue growth. Lastly, we stress-check. This is where we change a figure in our model and see if the model changes as we would expect it. For example, if I increase the tax rate assumption, I would expect my net income to decrease because my taxes will have gone up. But what if my net income actually increases? Then I would double-check my subtitles to make sure that they've been copied across from the historical years, and also check the sign convention in my forecast is consistent with the sign convention in my historicals. Then I would double-check my subtitles to make sure that they've been copied across from the historical years, and also check the sign convention on my forecast figures. Once we're happy that we've run all of our checks, we can then copy our Year 1 formulas over for the remaining forecast years.