Comparative performance is always used by organizations to identify their strengths and weaknesses. The same objective is served by a type of financial budget called a Budgeted Income Statement. A financial report that contrasts the estimated revenue and expense figures with the actual figures is known as a pro forma income statement. Simply put, it is a report that compares estimated figures to actual figures to assess the performance of the business.
How to Prepare a Budgeted Income Statement
How a budgeted income statement helps your business
A budgeted income statement is crucial because it offers insightful information about the advantages and disadvantages of a company’s financial position. Comprehensive budgeting can help a business:
A company’s projected financial results are specifically examined in a budgeted income statement to determine whether they seem reasonable. This can offer a variety of benefits, such as:
Assisting with risk management
Determine whether a business has the resources to carry out desired projects and plans using a budgeted income statement. This helps prevent bad decisions or overspending. Making this statement compels businesses to think about and prepare for potential future expenses.
Justifying acquiring assets and resources
A budgeted income statement aids in illustrating the importance of specific costs and the potential revenue they could generate for the business. It can demonstrate how the business could increase profits by making investments. Particularly for projects that are viewed as risky, stakeholders may be more inclined to approve payments if they see attractive income numbers.
Attracting investors
A budgeted income statement aids in evaluating the company’s financial standing and potential net income. Utilizing one demonstrates careful planning, and the statement itself gives investors insight into how the company is set up. Investors may be drawn to the budgeted income statement because it makes it clear how the company spends its money and the potential rewards of those decisions.
Setting goals
A company can establish and work toward common goals with the aid of a budgeted income statement. The estimates in the assertion set goals for the members of an organization to meet. For instance, a business may decide to reduce administrative costs in order to decrease overall operational costs and boost revenue.
Coordinating efforts between different departments
A budgeted income statement may highlight opportunities for organizational changes that would improve the company’s financial situation. It may also provide justification for hiring more people. For instance, a business may use their budgeted income statement to determine that adding a full-time employee would lower the costs associated with paying independent contractors and boost productivity. Eventually, such a hiring choice might help to increase revenue and boost overall net income.
Analyzing company performance
What is a budgeted income statement?
A budgeted income statement, also known as a budget income statement, is a document that aids in estimating and analyzing the revenue and expenses of a business. It’s a planning tool that many businesses develop as they develop and finalize their annual budgets at the start of the fiscal year. These assertions assist businesses in making wiser decisions and allocating resources so they are well-prepared for the future.
In a budgeted income statement, future projections for the year or another specified period are the main topic. For a more detailed analysis, some businesses may divide this financial report into smaller monthly or quarterly sections. You must forecast and make an estimate of all revenues and costs when preparing this statement. A budget income statement often includes these estimated figures:
Example of a budgeted income statement
Here is an illustration of a multi-step process for creating a budgeted income statement:
For the year 2022, Preston Refrigerator Company wants to create a budgeted income statement. The company has an income tax rate of 25%. Additionally, they predict selling 30,000 refrigerators at a $350 production cost per refrigerator. The business charges $1,400 per refrigerator for retail sales.
Heres what their budget income statement might look like:
Budget Income Statement for the Year Ended December 31, 2022 for the Preston Refrigerator Company
Sales were $42,000,000, cost of goods sold were $10,500,000, and gross profit was $31,500,000. Selling and administrative costs were $4,000,000, income from operations were $27,500,000, and income tax expense was $6,875,000.
Heres how to calculate each of these items:
Preston Refrigerator Company expects to generate a net income of $20,625,000 based on the budgeted income statement. This demonstrates that the business created an accurate annual budget. Because of the income the company generates, a positive net income justifies the spending and expenses of the business.
FAQ
Is budget and income statement the same?
- How A Budgeted Income Statement Works. …
- How a Budgeted Income Statement Helps You. …
- Let’s Start Preparing the Budgeted Income Statement. …
- To determine gross profit, find the sales and the costs of the goods sold.
- Find the Operating Expenses Total Amount. …
- Find the Operating Income. …
- Calculate the Interest Expense & Provision Income Tax.
What is the budgeted net income?
Although a budget and a statement of profit and loss are different, they are related. Revenue, expenses, and target results are all items that can be found in a budget and are all included in the income statement. In essence, a budget is a projected income statement.
