How to do an income projection

The income projections (profit and loss) statement is valuable as both a planning tool and a key management tool to help control business operations. It enables the owner/manager to develop a preview of the amount of income generated each month and for the business year, based on reasonable predictions of monthly levels of sales, costs and expenses.

As monthly projections are developed and entered into the income projections statement, they can serve as definite goals for controlling the business operation. As actual operating results become known each month, they should be recorded for comparison with the monthly projections. A completed income statement allows the owner/manager to compare actual figures with monthly projections and to take steps to correct any problems.

Industry percentage

In the industry percentage column, enter the percentages of total sales (revenues) that are standard for your industry, which are derived by dividing

Costs/expenses items x 100%
Total net sales

These percentages can be obtained from various sources, such as trade associations, accountants or banks. The reference librarian in your nearest public library can refer you to documents that contain the percentage figures, for example, Robert Morris Associates' Annual Statement Studies (One Liberty Place, Philadelphia, PA 19103).

Industry figures serve as a useful bench mark against which to compare cost and expense estimates that you develop for your firm. Compare the figures in the industry percentage column to those in the annual percentage column.

Total Net Sales (Revenues)

Determine the total number of units of products or services you realistically expect to sell each month in each department at the prices you expect to get. Use this step to create the projections to review your pricing practices.

  • What returns, allowances and markdowns can be expected?
  • Exclude any revenue that is not strictly related to the business.

 

Cost of Sales

The key to calculating your cost of sales is that you do not overlook any costs that you have incurred. Calculate cost of sales of all products and services used to determine total net sales. Where inventory is involved, do not overlook transportation costs. Also include any direct labor.

 

Gross Profit

Subtract the total cost of sales from the total net sales to obtain gross profit.

 

Gross Profit Margin

The gross profit is expressed as a percentage of total sales (revenues). It is calculated by dividing

gross profits
total net sales

 

Controllable (also known as Variable) Expenses

  • Salary expenses-Base pay plus overtime.
  • Payroll expenses-Include paid vacations, sick leave, health insurance, unemployment insurance and social security taxes.
  • Outside services-Include costs of subcontracts, overflow work and special or one-time services.
  • Supplies-Services and items purchased for use in the business.
  • Repair and maintenance-Regular maintenance and repair, including periodic large expenditures such as painting.
  • Advertising-Include desired sales volume and classified directory advertising expenses.
  • Car delivery and travel-Include charges if personal car is used in business, including parking, tools, buying trips, etc.
  • Accounting and legal-Outside professional services.

 

Fixed Expenses

  • Rent-List only real estate used in business.
  • Depreciation-Amortization of capital assets.
  • Utilities-Water, heat, light, etc.
  • Insurance-Fire or liability on property or products.
  • Include workers' compensation.
  • Loan repayments-Interest on outstanding loans.
  • Miscellaneous-Unspecified; small expenditures without separate accounts.

 

Net Profit (loss)

(before taxes) - Subtract total expenses from gross profit.

Taxes - Include inventory and sales tax, excise tax, real estate tax, etc.

Net Profit (or loss) after taxes: Subtract taxes from net profit (before taxes)

Annual Total - For each of the sales and expense items in your income projection statement, add all the monthly figures across the table and put the result in the annual total column.

Annual Percentage - Calculate the annual percentage by dividing

Annual total x 100%
total net sales

Compare this figure to the industry percentage in the first column.