The income statement forecast, sometimes called the profit and loss forecast, is one of the three main statements for business plan financials. The income statement forecast shows a business’s financial performance over an accounting period. The accounting period can be any length but is usually a month or a year.
There are many income statement forms, the layout below acts as a quick reference, and sets out the most commonly encountered accounting terms when dealing with a business plan income statement forecast.
What should a Income Statement Forecast look like?
A typical and useful income statement format for management is shown in the example below. The level of detail for each item will depend on your business, and who is using the information. For example, revenue could be broken down by product category, or operating expenses could be broken down into multiple lines such as rent, wages, light & heat etc.
|Revenue||100,000||Money from selling goods, also called sales, turnover|
|Cost of sales||45,000||Cost of the goods sold, materials,labor|
|Gross margin||55,000||Gross profit for selling goods|
|Operating expenses||30,000||R&D, Sales & marketing, General & admin costs|
|Depreciation||10,000||Expense of using long term assets|
|Operating income||15,000||Earnings before interest and tax|
|Finance costs||5,000||Costs using debt to finance the business|
|Income before tax||10,000||Income of the business before taxation|
|Income tax expense||3,000||Taxation expense based on income|
|Net income||7,000||Income left after paying all costs|
As an example, the annual report for Apple Inc. shows a typical income statement layout.
The Need to Understand the Income Statement?
The forecast income statement is important for many reasons:
- Management should use the income statement forecast to identify whether the business made a profit for the period. The important figure is the bottom line net income. It should also use it to establish % relationships between expenses and revenue, to spot trends in operating profit ratios, and for comparison of actual results against a projection.
- They are used by Suppliers to decide on whether credit is given as they identify the profitability of your business.
- Bank Managers utilise the income statement forecast as they base their lending ratios on certain aspects of it, for example interest cover = earinings before interest and tax / interest paid is used to determine whether the profit the business is making is sufficient to cover the interest payments on their loan.
- The income statement forecast is used by investors to decide whether to invest or not and at what price. For example they will look at the income before tax to establish their likely return on investment.
Any number of people could be using your income statement forecasts to make decisions about your business. It is important that you have an understanding of what information the income statement is providing and what that information is telling you.
Our financial projections template includes the income statement forecast template.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.