Income Statement Assumptions
There are six specific inputs required for the Income Statement (or P&L) calculations. Here are the instructions on entering each of these:
Annual Interest Rate Percentage Earned on Any Cash on Hand – This is the interest rate that you would expect from your bank account, which is generally going to be a very low rate. If you are uncertain what rate to use, we would recommend 0.5%, or 50 basis points. Your business should always have a positive amount of cash in the bank (see our Plan Cash Levels blog post).
Annual Discount Rate Percentage for Customer Lifetime Value Calculations – This is the effective interest rate that the value of a customer over time are discounted by in order to calculate Lifetime Value. We recommend a discount rate that roughly approximates your cost of capital. If in doubt, a 10% rate would most likely not be questioned by any investor or advisor.
Enter the Bad Debt Expense Assumption as a % of Revenue – The amount of Bad Debt varies by business type and industry and is impacted by when you invoice and collect. If your customers prepay because you invoice and collect in advance, then you should have no Bad Debt. If you bill in arrears, then you will likely have some Bad Debt. The level of Bad Debt in businesses that bill in arrears is typically 2% or less.
Income Tax Liability – This is used to calculate your income tax. You can choose between the following:
U.S. corporate tax rates (automatically applied)
Flat corporate rate (for flat tax countries)
Pass-through entity (if the business is an S Corp or LLC)
Flat Corporate Tax Rate for Flat-Tax Countries as a % – If you selected “Flat Tax”, enter that percentage here. Otherwise, leave this field blank.
Enter any Existing Loss Carry Forward or Tax Credit Amount – This only applies if your business is a taxable entity and not a pass-through entity. Typical scenarios include: 1) You've been in business prior to your plan year and you've accumulated losses that are carried forward, or 2) You have a remaining tax credit. For example, if you started your business in September and experienced no Revenue but had Expenses that resulted in losses of 25,000 and you are now planning your business model for the following year, you would enter your losses of 25,000 here so that your tax liability is lowered by the appropriate amount.