A budgeted income statement is a tool that allows businesses to estimate how well they will perform financially in the coming months and year. It looks like a regular income statement except that it estimates the expected revenue, net income, and expenses for an upcoming period instead of analyzing past performance.
A budgeted income statement can help you assess whether your future financial plans are realistic or you need to make some budget adjustments. It also allows you to anticipate (and plan for) any expected adverse changes in the market and determine whether or not you need financing.
Read on to learn more about budgeted income statements, including how to prepare one and how they can help you grow your small business.
What Are Budgeted Income Statements?
By definition, a budgeted income statement (or simply a budget income statement) is a tool to help businesses estimate future expenses, revenues, and profit for a given period. Companies that make use of budget income statements usually create them at the beginning of the fiscal year to help create a realistic budget for all four quarters. Some companies may separate this financial report into smaller monthly sections for a more detailed assessment of what the coming year may look like.
If you have plans to grow your business — say, by investing in new equipment, hiring more employees, or expanding your products or services — a budgeted income statement can help you determine if your plan is feasible. By preparing a budgeted income statement, you’ll be able to estimate your revenue and expenses, anticipate problems, and make decisions accordingly.
Before you can create a budgeted income statement, you’ll need to have created all the other operating budgets, such as the direct materials, direct labor, manufacturing overhead, and administrative expense budget.
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What Is Included in a Budgeted Income Statement?
A budgeted income statement is essentially created by subtracting the projected cost of goods sold (COGS) and other expenses from the projected net sales. It generally includes every section included in a normal income statement:
• Sales
• COGS
• Gross profit (sales – COGS)
• Operating expenses
• Operating income (gross profit – operating income)
• Interest expenses
• Estimated income taxes
• Net income
Budgeted Income Statement Example
Below is a budgeted income statement example for fictional company ABC. All numbers are based on forecasts (as well as data from previous years) and the statement represents the estimated profits and losses for the first month in the upcoming fiscal year.
Company ABC
Budgeted Income Statement
For Month Ending June 1
| Revenue | $50,000 |
| Cost of Goods Sold | -$15,000 |
| Gross Profit | $35,000 |
| Operating Expenses | -$20,000 |
| Operating Income | $15,000 |
| Interest Expense | -$3,000 |
| Income Tax | -$2,520 |
| Net Income | $9,480 |
Based on this budgeted income statement, Company ABC estimates they will earn a net income of $9,480. This helps justify their spending and expenses because of the positive net income generated for the company.
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Why Budgeted Income Statements Are Important
Budget income statements are important because they assess if a company’s financial plans look to be feasible. This can lead to a variety of benefits, including:
Risk Management
All growth involves an element of risk. A budgeted income statement helps you limit that risk by determining whether your company has the financial resources it needs to accomplish upcoming projects and plans for growth. It can help you avoid making bad business decisions and/or spending more than you can afford.
This type of statement also forces you to consider any potential pitfalls or added expenses that may come your way and plan for them so they don’t put your company at risk.
Justifying Purchases
“You have to spend money to make money” is the old adage that the budget income statement often verifies. Business owners can use a budgeted income statement to show that if the company is willing to spend X, it could potentially earn Y. This can be useful if you are looking for an outside investment or a small business loan to fund a project that might be viewed as risky.
Inform and Attract New Investors
A well-thought-out budgeted income statement can show any potential investors what your company’s expenses and profits will likely be in the coming months and year. When it’s clear business owners not only have a vision for their company’s future, but also a detailed action plan that outlines every expense and projected revenue, it can give would-be investors more confidence in the company and its mission.
Setting Targets
The projections from a budgeted income statement provides spending and earning targets that people in the company can work together to achieve. If the budgeted income statement sets a lower-than-usual budget for administrative expenses, for example, employees can then look for ways to reduce spending in order to meet the target and, in turn, increase revenue.
Tracking Performance
A budgeted income statement is also valuable to have at the end of the year because it allows you to compare profit and loss projections with actual numbers. Whether the company exceeds expectations or falls short, it provides an opportunity to ask why. For either scenario, the answers can be illuminating and affect the company’s next steps.
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Preparing a Budgeted Income Statement
Preparing a budgeted income statement is similar to a regular income statement. The only difference is that the amounts are based on projections rather than past performance.
The steps to prepare a budget income statement are:
1. Determine projected net sales. This is the total amount of revenue you expect to bring in from sales (minus any expected returns, discounts, or allowances). You estimate net sales by multiplying the expected number of units sold by price per unit.
2. Estimate the COGS and subtract it from the projected net sales. The COGS includes the direct costs of producing the goods or services that your company sells, such as materials, labor, and overhead costs. You then multiply the expected number of units sold by the cost of production. When you subtract COGS from projected net sales, you get estimated gross margin.
3. Estimate selling and administrative expenses and subtract them from the gross margin. Selling and administrative expenses can include advertising, rent, salaries, and other general and administrative expenses.
4. Estimate interest payments and taxes and subtract them from the remaining number. By calculating interest payments and other deductions, you can get an estimated net income for the projected period.
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Limitations of Budgeted Income Statements
While there are numerous benefits to preparing a budgeted income statement, this type of financial statement also has some limitations.
For one, a budgeted income statement is based on estimates and assumptions. While these assumptions are based on historical sales data and expected market conditions, actual sales and market conditions could turn out to be different than anticipated. In other words, these numbers are not set in stone.
Another downside to budgeted income statements is that they take a fair amount of time and effort, as well as business expertise, to prepare.
These statements are also somewhat inflexible. Because they are based on information from several other budgets, making any change to a budgeted income statement requires making a corresponding change in the supporting budgets.
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The Takeaway
A budgeted income statement can help businesses maximize profits and decrease expenses by forecasting how much they are likely to make and spend. It can be used as a tool for growth and strategic planning to ensure your company has the financial resources needed to have a successful year.
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FAQ
What is included in a budgeted income statement?
A budget income statement often includes estimates for sales, cost of goods sold (COGS), gross profit, operating income and expenses, interest expenses, income taxes, and net income.
Should all businesses use budgeted income statements?
Preparing a budgeted income statement can be a smart move for any business because it helps to justify expenses and verify that plans for future growth are financially feasible.
How do budgeted income statements help investors?
Budgeted income statements help investors by providing a company’s projected revenues and expenses for the coming months or year. It also allows investors to see how the company’s expected performance compares to previous years.
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