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Financing Growth Income StatementsRod McQueen said it best in The Last Best Hope: "Volume is vanity, profit is sanity, and cash flow is reality." Growing companies pursue new revenues, but volume isn't the same as profitability. There's also the question of whether the company can pay for the assets - current expenses and capital property - it uses in achieving growth. The income statement tracks revenues and expenses over a period of time - a month, quarter or year. A pro forma income statement is simply a forecast of expected revenues and expenses. Revenue: Sales and other income Each growth strategy has an impact on the relationship between these three crucial items. Dropping PricesIncreases in revenue may not offset changes in overheads or the increased risk of higher accounts receivable. Even if per-unit overhead costs remain constant - which is not often the case - volume rises may not be sufficient and net profit falls.
Depending on your profit margin, you may need to substantially increase your sales volumes simply to maintain your profit level, so carefully consider whether you'll be able to make up the difference either through increased sales or through after-sales options and add-ons. Adding OutletsMarginal outlets can bring down the whole chain at the beginning. Shared overheads can reduce net profit for the chain to less than that of the flagship outlet. The second danger is a general downturn in sales - marginal outlets quickly drain the chain's resources.
Geographic ExpansionShipping, warehouse and travel costs can wipe out new revenue.
Product Line ExpansionTrack cost of new-product sales separately to determine if it is worth the resources it consumes. |