Selling, general and administrative expense (SGA)
The technique for projecting the SGA account is similar to that for other
sales-driven expense items in the P&L statement. This involves examin-
ing historic trends in the SGA/sales ratio and selecting a projected ratio
that can then be applied to the projected sales figure to determine pro-
jected SGA expenses in cash terms. Alternatively, you can establish SGA
by projecting operating profit (as with gross profit) and then work back-
wards to establish SGA.
The former approach is, however, preferable, as a number of factors can
affect SGA, and analysis should include conditions that may cause a rise
or fall in this account. For example, if AmaOS intends to achieve sales
growth by expanding into new markets, it is likely that there will be an
increase in selling expenses typically associated with ‘start-up costs’
(salaries, commissions, advertising, legal, and consulting fees).
Depending on the type of company, SGA may or may not be critical. SGA
will be more important for retail stores than for a manufacturer. Other
companies may spend on advertising or R&D (which will probably be cut
back in a recession, since they fall under management control). You
should understand the nature of the company you are analysing, and
adjust these figures accordingly.
Operating profit
As with net sales and gross margin, forecasting expense items from
gross profit on down to operating profit (SGA, depreciation, other expenses)
follows a similar process. To determine operating profit, you can
calculate SGA as in the preceding paragraph and subsequently derive
operating profit, or
calculate the historical operating profit average and then work out
the various expense items above operating profit and below gross
profit by calculating the difference between the two.
Cash flow forecasting of financial statements
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Cash Flow Forecasting
At this stage, you should begin to get a feel of the company’s projected
sales performance.
Using the historical AmaOS spreadsheets, we see that operating expenses,
SGA, is also accompanied by depreciation and other costs. For the sake
of simplicity, we can estimate these items as a group by working out the
average percentage of operating profit to historical sales:
FACT SHEET 2000 2001 2002 2003 2004
OP/sales (%) 23.8 8.5 10.1 8.9 #N/A
Average OP/Sales 8.37 per cent.
This average percentage can then be used to estimate future operating
profits based on future net sales.
Projecting AmaOS’s operating income at a historical average figure of
20.1 per cent of net sales (OPM: operating profit margin), the resulting
projected operating income is:
2004 2005 2006 2007 2008
Net sales:
€614,538 €639,120 €677,467 €718,115 €761,202 €806,874
Last actual year 4% growth 6% growth 6% growth 6% growth 6% growth
CGS €426,293 €451,870 €478,983 €507,721 €538,185
33.3% GPM 33.3% GPM 33.3% GPM 33.3% GPM 33.3% GPM 33.3% GPM
GPM €212,827 €225,596 €239,132 €253,480 €268,689
8.37% OP/sales 8.37% OPM 8.37% OPM 8.37% OPM 8.37% OPM 8.37% OPM
Operating profit 53,494 56,703 60,106 63,712 76,535
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