- Writing a Business Plan
- Financial Statements
- Business Forecasting
- Business Checklist
Creating Your Forecasted Income Statement
After you complete the Financial Budgets (Step 1) and develop your First Year Forecasted Cash Flow Statement (Step 2), the next step is to develop your First Year Forecasted Income Statement (remember to create your forecasted financial statements one year at a time).
Recall from previous discussions, the Income Statement is a financial tool used to determine whether a company earned a profit or incurred a loss within a given time frame. The time frame could be for one day, one week, one month, or one year; but no more than a one year period. Your time frame, however, will be ONE BUSINESS YEAR for each of your forecasted years).
Your First Year Forecasted Income Statement will be developed by subtracting your first year's forecasted cost of goods sold and forecasted operating expenses from your first year forecasted sales. The resulting figure will be your first year's forecasted Earnings Before Taxes (EBT). Income taxes are then calculated and subtracted from the Earnings Before Taxes to arrive at your first year's Forecasted Net Income or what many people refer to as "THE BOTTOM LINE".
Below summaries the Budgets that need to be completed before you can develop your Forecasted Income Statement(s). Furthermore, in our example, Murray would use the following budgets to develop his Forecasted Income Statement(s).
|Budget Name||Required to Determine Your Forecasted|
|Sales Budget||Total Sales for each Business Year|
|Cost of Goods Sold Budget||Cost of Goods Sold for each Business Year|
|Operating Expense Budget||Total Operating Expenses for each Year|
|Income Tax Rate & Budget||Income Tax Rate|
|Fixed Asset Budget||Deprecation Expenses on Fixed Assets|
Below illustrates Murray's 200X and 200Y Forecasted Income Statements (IE Scholarship Information Services).
|SCHOLARSHIP INFORMATION SERVICES
FORECASTED INCOME STATEMENT
FOR YEARS ENDING DECEMBER 31, 200X, & 200Y
|Dec. 31, 200X||Dec. 31, 200Y|
|Total Sales (from Sales Budget)||$104,000||$192,000|
|Cost of Goods Sold (from COGS Budget)||$ 12,000||$ 26,141|
|Promotional Pamphlet Expense||$4,000||$2,000|
|University Advertising Expense||$8,000||$12,000|
|Newspaper Advertising Expense||$25,998||$34,998|
|Total Marketing Expenses||$37,998||$48,998|
|Office Salaries Expense||$15,600||$36,400|
|Employer Costs (11% of Salaries)||$1,716||$4,004|
|Office Supplies Expense||$2,500||$3,000|
|Business Cards, etc. Expense||$250||$0|
|Printing of Checks Expense||$75||$0|
|Message Center Expense||$4,600||$8,600|
|Toll Free Services Expense||$9,600||$19,200|
|Credit Card Service Expense||$4,992||$9,216|
|Bank Charges Expense||$240||$480|
|Depreciation Expense, Auto||$1,000||$2,000|
|Depreciation Expense, Office Equipment||$1,400||$3,200|
|Total Administrative Expenses||$46,173||$92,100|
|TOTAL OPERATING EXPENSES||$84,171||$141,098|
|Earnings Before Income Taxes||$7,829||$24,761|
|Less: Income Taxes (30%)||$2,349||$7,428|
|NET INCOME AFTER TAXES||$5,480||$17,333|
As you can see, Murray's 200X Forecasted Net Income After Taxes is $5,480. It was arrived at by subtracting Murray's 200X forecasted cost of goods sold and 200X forecasted operating expenses from his 200X forecasted sales. The resulting figure becomes known as "Earnings Before Taxes". An Income Tax Rate of 30% is then applied to, and later subtracted from, the Earning Before Taxes to arrive at Murray's 200X Forecasted Net Income ($5,480). Recall, Murray established the Income Tax Rate in Budget 14 entitled "Developing Your Income Tax Rate and Budget".
Before Murray can forecast his 200Y Income Statement, he must develop his 200X Forecasted Balance Sheet, Break-even Point, Sensitivity Analysis, and Ratio Analysis. REMEMBER: ONLY FORECAST ONE YEAR AT A TIME. This involves competing all forecasted financial statements and analysis for Year One (1) before proceeding to forecast the financial statements and analysis for Year Two (2). The same constraints apply to Year Three (3), and so on.
When all Forecasted Income Statements have been developed, they can be placed into columns on one single page (as illustrated above).
ADDITIONAL EXAMPLES ON FORECASTED INCOME STATEMENTS
For additional information, please refer to the section entitled "The Income Statement".