How to Convince an Investor Based Upon the Income Statement
Income statements, also referred to as profit and loss statements, provide a summary of a company’s revenue and sales over a given period. Investors use them to gain insight into the performance history of a company. By analyzing them, investors determine whether a company is operating successfully. It is from the income statement that investors get the profit or loss history of a company. Income statements are also used to value the shares of a company and to determine whether it is credit-worthy.
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Instructions
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Calculate the earnings per share your company has generated during the past three years. This is arrived at by dividing the net income in the income statement with the number of shares your company has. Earnings per share will show the investor the rate of returns he will make for every share he invests in the company. Also outline to the investor the ability of your company to use its resources efficiently by calculating the returns on investment. This is arrived at by adding the net income and interest expense figures in the income statement and dividing them with total average assets.
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Analyze the performance of your company for the past three years. This entails preparing a combined year-to-year comparison income statement. This enables the investor to compare the financial performance of your company for the last three years. From these statements the investor analyzes the changes in expense and sales figures. Positive growth in sales and revenue indicate a prospering company. If growth is negative, explain the reasons why and outline the measures you are putting in place to achieve positive growth. The year-to-year income statement also allows the investor to forecast the growth of the company.
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Outline the operating expenses of your company to the investor. This is arrived at by calculating the company’s operating expense ratio. Divide operating expenses with net sales to get the operating expense ratio. Compare the operating expense ratios of the company for the last three years. The lower the ratio the more favorable it is for your business. A declining operating expense ratio indicates that your company is in control of its costs.
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Tips & Warnings
Be transparent and honest when providing information to potential investors. If investors find out that you withheld vital information or were dishonest they will withhold the investment.
Consult a certified public accountant to prepare your financial statements and to assist in talks with potential investors.
