Joe Jones, dba Joe's Quality Stuff

Desired Income Approach to Planning

Step 1: Bottom Line – how much do you want to make? Net of $48,000. What about taxes?
At 20% tax rate, you need an additional $12,000 in Gross Income.
Enter $60,000 Gross Income. (1)
Enter Taxes of $12,000. (1a)
Enter Net Income of $48,000. (1b)

Step 2: In your industry, what is the typical % that Gross Income is to Sales?
Assume 20%. So what must Revenue be? $60,000/20% = $300,000.
Enter Revenue of $300,000. (2)

Step 3: Further research shows that a typical Gross Profit in your industry is 40%.
Calculate Gross Profit – 40% of $300,000 = $120,000, and enter on Projected Income
Statement. (3)

Step 4: Gross Profit plus Cost of Goods Sold must equal Revenue, so CGS must be $300,000
minus $120,000, or $180,000.
Enter Cost of Goods Sold of $180,000. (4)

Step 5: Operating Expenses, as the difference between Gross Profit and Gross Income, must
equal $60,000. (Gross Profit of $120,000 minus Gross Income of $60,000).
Enter Operating Expenses of $60,000. (5)
Note: We could go into further detail here if we know some of the details of this category
– like what are estimates for rent, utilities, supplies, etc.

Step 6: Inventory: Let’s consider how much inventory we need to start. Research suggests an
Inventory Turnover Ratio of 4. Inventory Turnover Ratio is Cost of Goods Sold divided
by Average Inventory, so $180,000 divided by something equals 4. That something must
be $45,000, so the “Average Inventory” must be $45,000. We can assume, then for this
exercise, that Beginning Inventory and Ending Inventory are both $45,000 (this would
average out to $45,000 -- $45,000 + $45,000 divided by 2 = $45,000).
Enter Beginning Inventory and Ending Inventory of $45,000 each. (6)

Step 7: If Cost of Goods Sold = $180,000, and Beginning Inventory and Ending Inventory are
the same $45,000, then Purchases must be $180,000. (We started out with $45,000 in
Inventory at the start of the year. We made Purchases during the year, and ended up with
an Ending Inventory of $45,000 and a Cost of Goods Sold of $180,000. Purchases,
therefore, must have been $180,000.)
Enter Purchases of $180,000. (7)

Step 8: Goods Available for Sales during the year were the original $45,000 we started with, plus
the $180,000 in Purchases, or $225,000.
Enter Goods Available for Sale of $225,000. (8)

You have completed a Projected Income Statement.