How to Prepare the Projected Income Statement
An income statement, sometimes called a profit and loss statement (P&L), is a financial document which shows income earned and expenses incurred, and the resulting difference between your income and your expense is called your net profit, which is often referred to as the “bottom line,” and this statement tells you if your business is profitable or not.
In its simplest form, and income statement is presented in the following format:
–>Income (your forecasted sales)
–>Minus Cost of Sales (your variable costs)
–>Equals Gross Margin
–>Minus Fixed Operating Expenses
–>Equals Net Profit
Plugging in some sample numbers into the income statement might look something like this:
XYZ Projected Income Statement
Cost of Sales $11,650
Gross Margin $10,700
Fixed Expenses $8,725
Net Income $1,975
The first thing you have to remember about putting together a projected income statement is that it covers a period of time into the future and so the first thing you must do is choose a point in time for the projections to begin, and from the starting date, you need to present your projected income statement monthly for a one year period. For example, if you will be starting your projection in March 2009, then it should present the following 12 months ending in February 2010.
Whether you are writing your financial projections by hand or using a computerized spreadsheet doesn’t matter and the first thing you will want to do is turn a sheet of paper sideways (landscape orientation) so you’ll have enough room to fit in all 12 months, and after you have turned your paper, now right near the top your 12 months going across the page, and be sure to give yourself some space on the left-hand side of the page to place your income statement accounts. After your 12th and final month, added the word, “Total” at the end of this road so you can add up all of your numbers for the year.
The first thing you’ll want to add is the results of your monthly sales forecast you have already developed and add the account title “Income” and then list in a row each of your 12 monthly projected income numbers, and once you’ve added all 12 months of numbers, be sure to tell told them in the last column (Total).
Right under your projected income figures you’ll want to include your cost of sales or variable expenses and your variable expenses are typically represented as a percent of your sales. If you have your variable costs expressed as a percentage, simply take this percent and multiply it by the respective monthly sales forecast. For example, if you found that you are a variable cost of sales for selling a pair of shoes were 58%, you would then take .38 times the projected sales in dollars for that category, and let’s suppose the projected shoes sales for March were $5000, and then your respective variable expense would be $1900 (.38×5000).
Gross margin is simply the difference between your forecasted sales figure for a given month and its respective variable cost and say, for instance, that your forecasted sales figure for March is $10,000 anywhere variable cost (calculated at 65%) are $6500. The resulting gross margin is $3500 (10,000-6500) and your gross margin is the amount of money you have available to pay for the fixed costs of operating your business and provide a potential profit.
After your gross margin rose, you should next provide your monthly fixed operating expenses and the level of detail regarding these expenses is up to you but you might try listing then in the major categories including Salary Wages, and Benefits Expense, Marketing Expenses, Occupancy Costs, and Administrative Expenses, and once you have these listed, you should tell told these expenses for each month.
After your fixed expenses, you already to present your projected net income for each month and to arrive at this figure, all you need to do is take your monthly gross margin number and subtract from it your total monthly fixed operating expenses, and the difference is your net profit or loss for that month. Don’t worry if this number is negative as many different kinds of businesses experienced losses during certain months of operations, especially in seasonal businesses, and your net profit is your “bottom line” and tells you whether your business is projected to operate at a profit or loss.
When you are developing your fixed operating budget, you may have noticed that there was no place to include a loan payment, and instead, the administrative expenses section only listed “Interest Expense.” It is important to note that loan payments (which include both principal and interest) should not go on an income statement, and only the interest portion of a loan should be expensed here, as the principal portion of a loan is not presented on the income statement but rather the cash flow statement. In order to figure monthly interest payments for a loan, you can use any loan amortization calculator found on the Internet or on many calculators.
Once you have calculated the net profit for each one of the 12 months on your projected income statement then you are done for the moment, and remember, and income statement tells you whether your business is profitable or not and it does not tell you anything about your cash situation or the way it moves in and out of your business. For this, you need to complete a cash flow statement.