Creating an Income Statement and Forecast

Creating Your Forecasted Income Statement

After you complete the Financial Budgets (Step 1) and develop your First Year Forecasted Cash Flow Statement (Step 2), the next step is to develop your First Year Forecasted Income Statement (remember to create your forecasted financial statements one year at a time).

Recall from previous discussions, the Income Statement is a financial tool used to determine whether a company earned a profit or incurred a loss within a given time frame. The time frame could be for one day, one week, one month, or one year; but no more than a one year period. Your time frame, however, will be ONE BUSINESS YEAR for each of your forecasted years).

Your First Year Forecasted Income Statement will be developed by subtracting your first year's forecasted cost of goods sold and forecasted operating expenses from your first year forecasted sales. The resulting figure will be your first year's forecasted Earnings Before Taxes (EBT). Income taxes are then calculated and subtracted from the Earnings Before Taxes to arrive at your first year's Forecasted Net Income or what many people refer to as "THE BOTTOM LINE".

Below summaries the Budgets that need to be completed before you can develop your Forecasted Income Statement(s). Furthermore, in our example, Murray would use the following budgets to develop his Forecasted Income Statement(s).

Budget Name Required to Determine Your Forecasted
Sales Budget Total Sales for each Business Year
Cost of Goods Sold Budget Cost of Goods Sold for each Business Year
Operating Expense Budget Total Operating Expenses for each Year
Income Tax Rate & Budget Income Tax Rate
Fixed Asset Budget Deprecation Expenses on Fixed Assets


Below illustrates Murray's  200X and 200Y Forecasted Income Statements (IE Scholarship Information Services).


Dec. 31, 200X Dec. 31, 200Y
Total Sales (from Sales Budget) $104,000 $192,000
Cost of Goods Sold (from COGS Budget) $ 12,000 $ 26,141
GROSS MARGIN $92,000 $165,859

Marketing Expenses:
Promotional Pamphlet Expense $4,000 $2,000
University Advertising Expense $8,000 $12,000
Newspaper Advertising Expense $25,998 $34,998
Total Marketing Expenses $37,998 $48,998

Administrative Expenses:
Office Salaries Expense $15,600 $36,400
Employer Costs (11% of Salaries) $1,716 $4,004
Office Supplies Expense $2,500 $3,000
Business Cards, etc. Expense $250 $0
Printing of Checks Expense $75 $0
Telephone Expense $1,200 $2,400
Legal Fees $1,200 $0
Message Center Expense $4,600 $8,600
Toll Free Services Expense $9,600 $19,200
Credit Card Service Expense $4,992 $9,216
Bank Charges Expense $240 $480
Miscellaneous Expenses $1,800 $3,600
Depreciation Expense, Auto $1,000 $2,000
Depreciation Expense, Office Equipment $1,400 $3,200
Total Administrative Expenses $46,173 $92,100

Earnings Before Income Taxes $7,829 $24,761
Less: Income Taxes (30%) $2,349 $7,428



As you can see, Murray's 200X Forecasted Net Income After Taxes is $5,480. It was arrived at by subtracting Murray's 200X forecasted cost of goods sold and 200X forecasted operating expenses from his 200X forecasted sales. The resulting figure becomes known as "Earnings Before Taxes". An Income Tax Rate of 30% is then applied to, and later subtracted from, the Earning Before Taxes to arrive at Murray's 200X Forecasted Net Income ($5,480). Recall, Murray established the Income Tax Rate in Budget 14 entitled "Developing Your Income Tax Rate and Budget".

Before Murray can forecast his 200Y Income Statement, he must develop his 200X Forecasted Balance Sheet, Break-even Point, Sensitivity Analysis, and Ratio Analysis. REMEMBER: ONLY FORECAST ONE YEAR AT A TIME. This involves competing all forecasted financial statements and analysis for Year One (1) before proceeding to forecast the financial statements and analysis for Year Two (2). The same constraints apply to Year Three (3), and so on.

When all Forecasted Income Statements have been developed, they can be placed into columns on one single page (as illustrated above).


J&B Incorporated
The Internet Company
The Maple Syrup Company


For additional information, please refer to the section entitled "The Income Statement".

Categories: Forecasting