Estimating Financial Projections Example
Assume that you are part of a team that is preparing to Launch Sunflower Solar LLC, a solar panel installation company that will be located in Wichita, KS. Sunflower Solar is targeting residential and commercial customers in south central Kansas. Installing solar panel on the roof of an individual residence or business is growing in popularity as more people and businesses are interested in cutting long term energy costs that continue to increase each year. While installations costs are expensive – $20,000 on average for a residence and more expensive for a business – installation prices are decreasing as solar panel costs decrease. The federal government in the U.S. allows homeowners to deduct 30% of the cost of the solar installation from their taxes. For now, this tax credit is available through 2021.
According to Solar Energy Industries Association sales for solar panel installation have grown 60% over the period 2011-2013. This growth is expected to continue into the future. There are several solar panel installation companies on the Inc. 5000 list for 2016 & 2017. Some of these include:
- EnviroSolar Power (Fort Worth, TX) 2016 sales $37.4 M; 3-year growth = 36,065.
- Missouri Sun Solar (Springfield, MO) 2015 sales = $9.8 M; 3-year growth = 2,327%; 2013 sales = $421.143. Founded in 2012
- Auric Solar (Midvale, UT) 2016 sales = $44.1 M, 2015 sales = $28.9 M; 2014 sales = $13.6 M; 3 year growth = 833%; 2012 sales = $755,000. Founded in 2010.
- Sigora Solar (Waynesboro, VA) 2015 sales = $5 M; 2014 sales = $3.2 M; 3 year growth = 661%; 2012 sales = $253,000. Founded in 2011.
- Cromwell Solar located in Lawrence Kansas installs 100 solar projects each year in the Kansas and Missouri region.
IBIS World industry report on solar panel installation estimates that the industry will grow at an annual rate of 16.1% over the next five years.
Industry Estimated Costs from IBIS World
- Net Sales – 100%
- Costs of Goods sold is 46% (This means that operating profit is 54% of sales)
- Operating Expenses is 48% of sales.
Using the data above, calculate the income statement for Sunflower Solar for the next three years.
| Year 1 | Year 2 | Year 3 | |
| # of solar installations (units) | |||
| Price | |||
| Total Sales | |||
| Costs of Goods Sold | |||
| Gross Margin | |||
| Operating Expenses | |||
| Gross Profit |
Calculations in Spreadsheet:
Total Sales = # of units x price
Gross Margin = Total Sales – Gross Margin
Gross Profit = Gross Margin – Operating Expenses
Assumption Sheet: How did you calculate your price, total sales, sales growth, and expense (e.g., cost of goods sold and operating expenses) projections? Please describe your logic.
For an example projection and assumption sheet please see below.
Possible Projections
Assumption Sheet: How I calculated the projections
Price: I used the average price for the industry assuming that this price is comparable to the price that my competitors charge as well. Because the price of the equipment (solar panels) is decreasing I estimate that the average market price will decline over time. Consequently, I estimate that the average price for a solar panel installation will be $18,000 in year 3.
First year sales growth: I expect that in the first year we will not match our main competitor in our geographic areas (Cromwell Solar) but we will still sell and install 14 projects. This will equate to $253,00 in revenue in year 1. This amount is comparable to peer companies in other markets in their early years. For example, Missouri Sun Solar in Springfield, Missouri, a smaller market than ours, achieved over $400,000 in sales their first year of operation. Our estimate seems conservative when compared to this company operating in a comparable market.
Sales Growth. I estimate that SunFlower Solar will grow 150 % between year 1 and year 2 (700-280/280) and 119% from year 2 to year 3 is (1,530-700/700). This equates to a growth rate of 446% between year 1 and 3 (1,530-280/280). This growth rate is reasonable for a new startup and a lot lower than peer companies operating in other markets who have experienced a three year growth rate of between 600% and 36,000%. Further, the units sold in year 3 (85) are still lower than our competitor, Cromwell Solar. Accordingly, these estimates seem conservative and reasonable.
Expense Estimates: To calculate the cost of goods sold and operating expenses I used industry averages as a percentage of sales.