====== Income Statement Analysis ======

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**How to Analyze a //Pro Forma// Income Statement:**

Every investor pitch and every loan application will include a subset of a //pro forma// income statement for review. Any investor or lender interested in performing due diligence will ask for a more detailed //pro forma// income statement. <php>echo $conf['comp_name'];</php> performs an analysis of the income statement looking for the same properties that investors and lenders look for; these are properties that often foretell a poor financial outcome for the company. The primary reason for surfacing these issues is to find solutions early and to prevent problems. The primary reason for using a tool like <php>echo $conf['comp_name'];</php> to find these issues is so //you// can either:

   * fix these problems rather than suffer the embarrassment of potential investors and lenders finding them, or
  * understand why the problem is not a problem, so you are better prepared to defend yourself if a potential investor or lender raises the issue. After all, you may not consider every problem that <php>echo $conf['comp_name'];</php> raises to be a problem.

Here is a partial list of the kinds of problems that <php>echo $conf['comp_name'];</php> looks for

  * Revenues Fail to Increase Rapidly Enough
  * Revenues Increase Too Rapidly to Be Believable
  * EBITDA Fails to Become Positive
  * EBITDA Fails to Become Significantly Positive
  * EBITDA Much Higher than Industry
  * Earnings After Tax Too Low
  * Earnings After Tax Unbelievably High
  * Unlike Most Start-ups, Company Profitable in 1st Year
  * Retained Earnings Fail to Become Positive
  * Low Gross Margins
  * Gross Margins in Later Years Too Low for Industry
  * Marketing and Sales Expense Out of Line with Industry

Whenever <php>echo $conf['comp_name'];</php> finds a potential problem, it highlights the symptom for you on the income statement, and offers a list of suggested solutions, each of which describes exactly which assumptions you need to change to fix the problem. However, don't just "fix" the problem by blindly selecting one of the suggestions. That will result in you having a set of financial statements that //look //  good but have no basis in reality. Instead, make changes to assumptions that you believe are feasible and then change your business strategy to reflect the new plan. If none of the suggestions are feasible in your mind, then perhaps you don't have a viable company :).

**Related Questions:**

**[[:faqs:analysis-income-statement:low-gross-margins|What's so terrible about having low gross margins?]]**


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