What Is a Budget Income Statement? (With an Example)
Updated August 24, 2023
Accounting professionals usually estimate a company's future profits and revenue to evaluate potential expansions, new projects, or upgraded machinery and equipment. To do this, accountants can use budgeted income statements that give the company a sound estimate of its future expenses and income. Learning more about this financial document and how an organization can benefit from it might allow you to help a company better plan its next investments. In this article, we discuss what a budget income statement is, explore the benefits of this document, share how to build a basic one, and provide an example.
What is a budget income statement?
A budget income statement is a document that accounting professionals prepare to estimate a company's future expenses and revenue for a specific period. This statement aims to forecast this information based on previous reports and financial results, as its purpose is to allocate resources that support the company's daily operations for the coming accounting year. An accountant can create quarterly or yearly budgeted income statements depending on the projects the company is developing, as it can be an excellent way to control the business' finances. Usually, these statements consider estimated earnings before taxes, costs of goods sold, and gross profit.
Accountants can generate this type of statement by using several financial reports, such as sales levels, cash flow, liquidity levels, production or manufacturing costs, and fixed costs. Comparing the previous budgeted income statement to its corresponding income statement helps you understand how accurate the first document was and what elements you can evaluate to increase its precision.
For example, you can consider technology costs the company may incur to maintain its competitiveness. Income statements are financial documents that contain the business' revenue and expenses within a particular period. Companies usually publish their income statements after their fiscal year.
How companies can benefit from preparing budgeted income statements
These types of reports are beneficial as they can enable a company to:
Plan their next steps. This financial document can help a company create new product lines, expand its existing operations, buy new technology, upgrade existing machinery, and hire new employees. By estimating its revenue and expenses, the business can also create or adjust marketing campaigns that may increase its sales in the coming year.
Allocate resources to existing projects. Usually, there are some managers within an organization waiting for new resources to advance or finish their projects. By estimating expenses, the company's accounting team can allocate resources to these projects, increasing the business performance, generating new income sources, or attracting new investors.
Reduce future expenses. Because forecasting potential costs requires reviewing previous income statements, annual non-operating costs reports, and interest and taxes, accounting professionals can evaluate what expenses were unnecessary. This can help them avoid incurring the same costs again and make the company's annual budget more efficient.
Supply the company's inventory. Preparing budgeted income statements can also help a company have enough stock to satisfy customer orders. By reviewing previous sales and inventory reports, accountants can meet with sales managers and discuss the next actions to fulfill the demand and avoid having low inventory levels during the highest demand periods.
Improve business goals. An accurate estimate usually allows a company to set clear and realistic business goals. Working toward achievable goals enables employees to focus on the most productive, urgent, and essential activities and discard ones that have unrealistic objectives.
Adapt to sudden changes. Sudden changes within an industry can sometimes impact a company's operations, products, or employees. By considering potential changes such as new legislation, stronger competitors, or technologies, the company can prepare strategies to help it cope with these events.
Access to new capital. A realistic budgeted income statement can help the company access new capital, such as new investors, bank loans, or merger proposals. This is possible because capital sources can feel more comfortable investing money in a company with organized budgets and feasible business objectives.
How to prepare a budgeted income statement
This statement can help you plan and coordinate activities across the origination and provide all employees with a long-term business vision. Here are some steps you can follow to prepare this document:
1. Estimate the company's gross profits
A company's annual sales statement is a report that contains the business' sales activities. This document usually reports how much the company obtained by selling its products or services. It considers the gross sales minus customer discounts and units returned. This statement also contains detailed information about the business' sales, such as leads, existing accounts, number of new customers, and sales volume. You can use the previous year's sales statement to forecast the company's subsequent gross profits.
2. Find the gross profit margin
To find the gross profit margin, it's necessary to subtract the costs of goods sold (COGS) from your estimated gross profit. Also known as manufacturing costs, the COGS are expenses incurred by the company to produce a product or service. COGS typically include raw materials, salaries and wages, machinery, or repair costs. You can use the previous year's cost statement to forecast the next COGS.
3. Estimate the company's net operating income
After estimating the next gross profit margin, you can calculate the company's following operating income. To do this, you can check its last annual operations and sales reports and look for its total administrative costs, marketing and sales expenses, and operating costs. To calculate the net operating income, you can estimate these costs and subtract them from your expected gross profit margin.
4. Estimate the company's earnings before interest and taxes
First, check its previous non-operating activities statements to review its latest non-operating income and costs. These are activities unrelated to the primary activities and operations of the business. To calculate earnings before interests and taxes, you can estimate this non-operating income and add it to your expected net operating income, then subtract your predicted non-operating costs.
5. Estimate the company's next net profits
The best way to do this is by calculating the percentage the company paid in interest and taxes from its net operating income within the previous year. You can find this information in the last financing report. To calculate the next net profits, you can predict the interest and taxes the company might pay at the end of the coming year and subtract this from your expected earnings before interests and taxes.
Example of a budget income statement
Here is an example of a budget income statement for a manufacturing company:
Montreal Luxury Cars is a manufacturing company located in Quebec. Its accountants are preparing its budgeted income statement for the following year. To do this, they review the company's last income statement, check the key performance indicators report, and evaluate the business' cash flow. They also meet with the organization's managers to know the status of each project they're developing and revise any potential changes that may occur in the federal and provincial tax regulations. After reviewing all the financial reports and potential sources of expenses, these accounting professionals prepare the budgeted income statement. Here's the document:
Montreal Luxury Cars
Budgeted income statement
For the year ended December 31, 2010
Cost of goods sold (COGS)
Gross profit margin
Annual operations report
Annual operations report
Marketing and selling costs
Annual sales report
Total regular costs
Net operating income
Non-operating activities report
Non-operating activities report
Earnings before interests and taxes
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