Budgeted Income Statement

Budgeted Income Statement Meaning

The Budgeted Income statement, also known as Pro Forma Income Statement, presents the forecasted financial performance of the entity for future years of operations. It assists the management in setting the financial target for future years, designing and implementing new strategies to achieve the set financial goals and also to track the actual periodic performance with the forecasted numbers.

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Source: Budgeted Income Statement (wallstreetmojo.com)

Format of Budgeted Income Statement

How to Prepare?

The Budgeted Income statement can be prepared quarterly or yearly. However, it is advisable to prepare the current year financial projectionsFinancial ProjectionsFinancial projection is a statistical forecast of a company's future revenue and expenditure based on historical market patterns, internal factors, data interpretation, anticipated market developments, and experiences. To meet production or sales targets, both short-term and long-term financial estimates are sometimes evaluated.read more at quarterly intervals to monitor the actual performance as compared to budgeted numbers at the end of every quarter. It is merely the combination of Sales/Revenue Budget, Cost of Goods Sold Budget, Operating expense budget and cash budgetCash BudgetCash budget refers to cash inflows and outflows estimations made by a company's management over a given period to evaluate whether the business has adequate cash & cash equivalents to meet its operational needs in the coming future.read more.

For example, ABC Inc. is in the business of manufacturing and selling LED monitors. During the year the company sold 100000 units of LED monitors. The company also generated income from interestIncome From InterestInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more on bank deposits. Here, the income generated from the sale of the LED monitor will be considered the operating revenueOperating RevenueOperating revenue is defined as revenue earned by an individual, corporation, or organization from the core activities that they undertake on a regular basis. There are several methods to earn revenue, but operational revenue is earned by the core business activities that the organization undertakes in its daily operations.read more as it is the core business activity of the entity, and interest incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more on deposit will be regarded as non-operating incomeNon-operating IncomeNon-Operating Income, also called Peripheral Income, is the capital amount that a business earns from non-core revenue-generating activities. The examples include profits/losses from a capital asset sale or Foreign Exchange Transactions, Dividend Income, Lawsuits losses, & Asset Impairment losses, etc. read more.

The total operating revenues are derived from the sales budgetSales BudgetThe sales budget forecasts the quantity that the entity expects to sell and the amount of revenue generated from the sale of such amount expected in the future, based on the management’s judgment related to the competition, economic conditions, market demands, and market demands past trends.read more.

• The cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more is derived from the Cost of goods sold budget. The cost of goods sold comprises all the expenses directly related to manufacturing or procurement of goods such as material cost, labour cost, factory overheadsFactory OverheadsFactory Overhead, also called Factory Burden, is the total of all the indirect expenses related to the production of goods such as Quality Assurance Salaries, Factory Rent, & Factory Building Insurance etc. read more, and direct expenses.
• The value of operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more is calculated with the help of the Operating Expense Budget. Operating Expense includes office administration expenses such as rent, insurance, salaries, and selling and marketing expenses.
• Similar to Non-operating income, Non-operating expensesNon-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.read more are the expenses that are not related to the operating activity of the business. Examples of such expenses are litigation claim payments, business restructuring expensesRestructuring ExpensesRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements.read more, a loss incurred on the sale of assets, etc.
• Earnings before Interest and TaxesEarnings Before Interest And TaxesEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more (EBIT) is the total profit of the entity before deducting interest expenses and statutory taxes.
• The amount of statutory taxes can be calculated at the current corporate tax rates.
• The value of interest expenses can be derived from the cash budget. A cash budget is the projection of future cash inflows and outflows.

Advantages

• It helps in planning and coordinating the activities of the various departments and functions as the budgeted income statement is the combination of sales, cost and expense budgets.
• Provide a long term vision about the investing and financing decision of the entity to the management.
• Play a vital role in the designing, implementation, and execution of various financial strategies to accomplish target projections.
• Provide constant vigilance on the financial performance of the entity by comparing the actual reported data with forecasted data.
• Serves the base for the investors willing to invest their money in the entity

Limitations

• Based on Assumptions – The budgeted income statement is prepared using various assumptions and estimates. Generally, these assumptions are based on historical trends, and market scenarios prevailing at the time of projecting the statement. Inaccurate assumptions and estimates can lead to significant variation between actual data and forecasted data. Also, negligence of the effect of changes in economic conditions and policies can create a question on the accuracy of the forecasted data.
• Time-Consuming – Forecasting isn’t a one day job, and the preparation of budgeted income statement requires a lot of time as well as managerial expertise to forecast the underlying assumptions accurately.
• Execution generally does not occur automatically – Although the budgeted income statement provides a basis for financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process.read more and setting departmental and functional goals, the success of it to a large extent depends on effective execution at all levels. If the departments do not perform to match their financial targets and co-ordinates well with other departments, it won’t be easy to realise the forecasted performance.
• Inflexibility – The budgeted Income statement can be viewed as inflexible as it is a combination of information from various other budgets and incorporating any change requires the change in supporting budgets (such as sales budget, cost budget, cash budget, operating expense budget as well).

Conclusion

The budgeted Income statement is a resourceful tool for management to project the financial performance and profitability of the entity. It sets the vision into numbers and serves as the basis of the implementation of various strategies at all levels in the entity. With the exercise of managerial expertise and due care in making assumptions and estimates, it can reduce the possibilities of inaccuracies and can be utilised in planning the future investing and financing decisions effectively.

Recommended Articles

This has been a guide to Budgeted Income Statement. Here we discuss how to prepare a budgeted income statement along with its purpose and the format. You can learn more from the following articles –

• Participative Budgeting
• Strategic Budgeting
• Operating Budget
• Static Budget