Company department heads typically look into performance reports and compare them with the previous quarter or year’s figures to understand trends and check areas for improvement versus those that they excel at.
In the world of finance, a budgeted income statement works just like any performance report as it compares estimated revenue and expenses versus actual and real-world figures. It lists down estimated figures side-by-side with real numbers to look into company performance.
Businesses need a budgeted income statement to gauge the efficacy of their financial planning process. Typically, businesses and organizations will prepare a budgeted balance sheet to pair with the income statement to align financially feasible plans. Finance teams may create different projections according to different scenarios, helping them track possible outcomes and make decisions accordingly.
But more than just tracking the performance within departments, managers will also refer to a budgeted income statement report to evaluate company performance.
These budget and performance goals are often set at the start of the year and are usually based on past performance and growth expectations.
Outside the company, a budgeted Income statement report also informs investors on the current financial performance, how confident they are in specific financial periods, and how well they are tracking when compared to historical figures.
Preparing a Budgeted Income Statement
To prepare a budgeted income statement, you’ll need to track company revenue, expenses, and net income. You’ll then need to set realistic revenue goals and then create an estimate of different revenue items. This means having to include items such as investment gains, interest income, and vendor refunds.
Here’s an example:
1. Set your revenue thresholds for the upcoming quarter, which can be at 150% of the last quarter.
2. Set a goal for your expenses and create an estimate for operational costs, operating outlays such as acquiring new equipment, and any other non-operating costs.
3. Determine the amount of money that you would want to spend depending on your company’s goals and current finances
4. Finally, indicate the net income (or loss) based on the above revenue and expenses. For easy tracking, the number of line items in a budgeted income statement should be the same as your actual income statement.
To ensure accuracy in estimates, the company must always refer to the latest and best assumptions according to unbiased estimates. It also works to complete different budget model iterations to draft a budgeted income statement close to what is expected.
Being as detail-oriented as possible is crucial. It helps C-suites and investors understand the state of the company’s operations and finances and just what they can achieve.
Once you’ve arrived at a final estimate, add the budget information in the budget field for every line item in the income statement. The final module usually includes the budget itself, actual numbers, and the variance.
Finance teams must analyze these variances and know the reason behind them, which they usually indicate in a report that comes with the financial statements.
It’s worth noting that businesses that do not work on annual budgets don’t need to create a budgeted income statement. Instead, they can use a short-range forecast to make a forecasted income statement for the next few quarters.
Streamlined Budgeting with Performance Canvas
Companies need a reliable budgeting method to track performance and clearly understand revenue versus expenses, which is crucial to making informed business decisions. Managers rely on financial reports and budget income statements to justify the resources needed for a particular project, to work closely with other departments, and for the company itself to attract investors.
A budgeted income statement is most effective when it can showcase all budget periods in one report, so managers can easily track the results from different periods and spot problems. Performance Canvas is a modular planning, budgeting, and forecasting software that can integrate with your on-premise ERP system or cloud ERP system. If you work with any of the Dynamics 365 ERP systems, Performance Canvas is the ideal budgeting, forecasting, reporting, and consolidation tool built to streamline your Microsoft Dynamics Budget Process.
Explore all other features that Performance Canvas offers today and decide for yourself why it’s the right bet for your company’s budgeting needs.