Projected Income Statement
What is a Projected Income Statement?
A projected income statement shows an estimate of the profits and losses in a future period of time – the next quarter or the next fiscal year, for instance. It uses the same format as a regular income statement, but projects the future rather than recording numbers from the past.
So, what does an income statement look like?
Think of it as a set of stairs. You start at the top with the total amount of sales revenue made during the accounting period. Then you go down, one step at a time. At each step, you make a deduction for certain costs or other operating expenses associated with earning revenue, which brings you to a specific subtotal. At the bottom of the stairs, after deducting all expenses, you learn how much you actually earned or lost during the accounting period (can be either a calendar or fiscal year, but also a week, month, or quarter, etc). People often call this “the bottom line.”
Components of Income Statement
A typical income statement for a small business will include the following steps, though they are not limited to using only these three:
Generally the first major subtotal on an income statement, Gross Profit is calculated by deducting Cost of Goods Sold from Revenues.
The next major subtotal, Operating Income, is calculated by deducting Fixed Expenses (also known as Operating Expenses) from Gross Profit.
Operating Expenses include costs such as the salaries of any employee personnel, as well as any research and development costs, marketing costs, and more. These are considered operating expenses because, unlike the costs included in Costs of Goods Sold, they cannot be directly linked to the production of products or services being sold.
We also deduct depreciation from Gross Profit in order to determine Operating Income. Depreciation takes into account the wear and tear on assets, such as machinery, tools, and furniture that are used over the long term. Companies spread the cost of these assets over the periods they are used. This process of spreading these costs is called depreciation or amortization. The “charge” for using these assets during the period is a fraction of the original cost of the assets.
Though larger companies may have additional subtotals or steps on their income statements after the calculation of Operating Income, much of this is outside the scope of our discussions.
After we have determined Operating Income, the last thing we need to do before determining the final subtotal, Net Income, is figure out our income tax expense. Though income tax expense varies widely depending upon how a business is structured, it can generally be estimated using publicly available tax brackets. Once income tax expense has been deducted from Operating Income, we are left with the “bottom line” figure of Net Income, or Net Loss if the number is negative. This figure tells us how much a company has earned or lost during an accounting period.
Projected Income Statement Walkthrough
Let's say you are a small business owner and are considering an expansion into the widgets business. You have decided to put together a projected income statement for the following year to see if the new product is worthwhile.
The first item you need to estimate is your revenue, also known as sales to customers.
You estimate that you can sell 1,000 widgets at an average price of $50 each, so your revenue estimate is $50,000.
Cost of Goods Sold
Next, you need to estimate your cost of goods sold. This is the cost of buying or producing the widgets.
In this case, you have already located a supplier who will sell them to you at $1,500 for 100 widgets, or $15 each. So, your estimated cost of goods sold for the 1,000 widgets you anticipate selling will be 1,000 * $15 = $15,000.
Since Gross Profit is simply Revenue - Cost of Goods Sold, in this example, the Gross Profit is $50,000 - $15,000 = $35,000.
Next, you need to estimate the additional operating costs you’ll incur by offering this product. You’ll need to pay a salesperson a 10% commission on sales of your widgets, which is $5 each. For the 1,000 anticipated sales, this will be $5,000 for the year.
You also anticipate spending $500 a month for brochures and $1,500 a month for additional office costs, such as office supplies, telephone calls, and other odds and ends. Operating expenses are generally shown in broad categories, so your operating expense projection will be:
Marketing costs: $6,000 ($500 a month * 12 months)
Office costs: $18,000 ($1,500 a month * 12 months)
Finally, we can estimate our net income.
Reminder: Net Income = Gross Profit - Operating Income
Net income is our gross profit of $35,000 minus our operating expenses of $29,000 = $6,000 for the year.
The Final Projection
Now that you've put together the revenues and costs of this venture, it’s time to create your projected income statement. Here is the final projection, in standard income statement format:
Projected Income Statement
For the Year Ended December 31, 20XX