Income Statement Modeling
Master the step-by-step flow through the income statement with professional-grade formulas, real calculations, and IB-level modeling techniques.
Analyst Objective
Learn to build a clean historical-to-forecast income statement using percent-of-revenue drivers so the changes flow through to Net Income automatically.
What You'll Learn
1Foundation: Historical Setup
Before forecasting, gather 3-5 years of historical data. Align exact line names across all periods to ensure consistency.
Key Ratios to Compute
Revenue Growth %
Example: If 2023 = $200M, 2024 = $220M → Growth = (220/200) - 1 = 10%
COGS % of Revenue
Example: COGS $120M / Revenue $200M = 60% COGS ratio
SG&A % of Revenue
R&D % of Revenue
EBITDA Margin %
EBIT Margin %
Net Margin %
Purpose of Historical Analysis
Establish base-year averages to guide forward assumptions. Understanding historical trends helps you make realistic projections and identify anomalies.
2Forecasting Revenue (Top-Line)
Use a simple but universal growth-rate method for generalist modeling contexts.
Core Formula
Worked Example:
Anchor on the Last Historical Year
Start from 2022A revenue — the base for your forecast.
Revenue Drivers
Every forecast starts from a **driver view** of the business — either top-down (market share) or bottom-up (units × price).
Tapering Growth Path
13% → 12% → 10% → 8% — higher in early years, then gently decelerating as the business matures.
Early forecast years carry higher growth; later years taper toward a steady-state range used for the terminal value.
Best Practices
1. Anchor on Historical Trends
Base your growth rate on 3-5 year historical average, adjusted for future expectations
2. Tapering Growth (Advanced)
Model growth declining over time for mature companies:
Example: If growth was 15% and decay factor is 0.9 → Next year growth = 13.5%
3Forecasting Cost of Goods Sold (COGS)
COGS normally scales with sales volume and pricing. Use percentage-of-revenue method for consistency.
Formula (Simple % Method)
Worked Example:
Gross Profit & Margin Calculations
Tips
- Use multi-year average of COGS% as your starting point
- Flag unusual spikes in margin for discussion with management
- Consider segment-level COGS if company has diverse product lines
4Forecasting Operating Expenses (OpEx)
Combine or separate into R&D, SG&A, or single OpEx line. Choose method based on company disclosure level.
Formula (% of Revenue Method)
Worked Example:
Alternative: Fixed + Variable Approach
To simulate operating leverage (costs growing slower than revenue):
Example: $20M fixed + (220 × 15%) = $53M total OpEx
EBITDA Calculation
Starting Point: High Opex % of Revenue
In the base year, SG&A, R&D, and S&M consume a large share of revenue.
Opex Leverage Story
Because SG&A, R&D, and S&M are partly fixed, they usually grow **slower than revenue**. Their combined % of revenue drifts down over time — this is operating leverage.
- SG&A often declines the fastest (back-office scale).
- R&D tends to be flatter as % of revenue.
- S&M falls as the brand and customer base mature.
Total opex % of revenue trends down each year, even as revenue grows — this is why EBITDA margins expand in scalable business models.
5Depreciation & Amortization
If no PP&E schedule yet, assume a stable D&A ratio as percentage of revenue or PP&E.
Method 1: % of Revenue
Example: 5% × 220 = 11
Method 2: % of PP&E
More accurate with PP&E schedule
Method 1: D&A as % of Revenue
Simplest approach — multiply forecast revenue by an assumed D&A % based on history.
D&A Modeling Approaches
In practice, you pick the method that best matches the business model andmateriality of D&A. Bankers care more about a sensible story than a perfect GAAP schedule.
In interviews, it's enough to say that you usually model D&A as a **% of revenue** or a **% of PP&E**, and that a full PP&E roll-forward is only needed for accounting-heavy tasks.
EBIT (Operating Income)
6Interest & Other Income/Expense
Keep structural, not industry-specific. Interest creates circularity with debt schedules.
Interest Expense Formula
Example: ($50M debt × 5% rate) = $2.5M interest
Interest Income Formula
EBT Calculation
Note: Interest expense creates circularity once you model Debt/Cash schedules. We'll resolve this in Lesson 5.
7Taxes
Apply a constant blended effective rate (typically 25-30% for US companies).
Tax Formula
Worked Example:
Net Income Calculation
8Margins & Ratios
Add diagnostic formulas for model reasonableness checks.
Gross Margin %
88/220 = 40%
EBITDA Margin %
33/220 = 15%
EBIT Margin %
22/220 = 10%
Net Margin %
15/220 = 6.8%
Interactive Income Statement Demo
Watch how each line item flows through the income statement step-by-step. This animation demonstrates the formulas and calculations you just learned.
Step 1: Revenue Forecast
Apply 10% growth rate to prior year revenue
Pro Tip: Notice how each calculation builds on the previous one. This cascading structure is fundamental to financial modeling - changing one assumption flows through the entire model automatically.
9Complete Forecast Example
| Line Item | 2023A | 2024E | 2025E | Formula |
|---|---|---|---|---|
| Revenue | 200 | 220 | 240 | =Prev×1.10 |
| COGS | (120) | (132) | (144) | =Rev×0.60 |
| Gross Profit | 80 | 88 | 96 | =Rev-COGS |
| OpEx | (50) | (55) | (60) | =Rev×0.25 |
| EBITDA | 30 | 33 | 36 | =GP-OpEx |
| D&A | (10) | (11) | (12) | =Rev×0.05 |
| EBIT | 20 | 22 | 24 | =EBITDA-D&A |
| Interest Exp. | (2) | (2) | (2) | flat assumption |
| EBT | 18 | 20 | 22 | =EBIT-Int |
| Taxes (25%) | (4.5) | (5) | (5.5) | =EBT×0.25 |
| Net Income | 13.5 | 15 | 16.5 | =EBT-Tax |
Key Insight: Changing growth or margins flows through every line automatically. This is the power of percentage-driven modeling.
10Practical Modeling Techniques
Check Linkage
Net Income must feed Cash Flow and Balance Sheet later. Ensure formulas reference the correct cells.
Dynamic References
Use =$B$2 style for assumptions to update instantly across the model.
Audit Subtotals
Revenue–COGS = GP; GP–OpEx = EBITDA. Verify each calculation.
Build Integrity Checks
Totals add correctly; margins within realistic bands (e.g., 35-45% GM).
Stress-Test Sensitivity
±5% revenue or ±100 bps margin → observe Net Income impact.
Key Takeaways
Forecast top-line first, flow logically to Net Income using percentage drivers
Use percentage-of-revenue or fixed + variable drivers, not random numbers
Maintain clarity, consistency, and checkability — hallmarks of real IB models
Interest creates circularity with balance sheet (resolved in later lessons)
Net Income flows to both Cash Flow Statement and Balance Sheet