To create a projected income statement (also called a statement of projected earnings), use historical information, customer research and market data to estimate future changes in sales volume. Then, adjust each line item on the income statement to reflect the change and put the data in an income statement format.
Investors and other stakeholders don't expect your financial projections to be perfect. They will, however, want to understand the thought process you used to arrive at your estimate.
1. Determine Change in Sales Volume
Estimate how much you expect your sales volume to increase. To do this, you need to have a solid understanding of your market, your sales channels and your customers. Consider information such as:
- Historic trends in sales volume growth for your company.
- Your relationship with each major customer and how much you expect them to purchase in the future.
- Your ability to convert new customers through marketing.
- The popularity of your products and services.
- Product seasonality that affects purchasing behavior.
2. Convert Change in Sales Volume to a Percentage Format
Calculate the percentage of increase or decrease you expect in sales volume. To do this, subtract the prior year's sales volume by projected sales volume, and divide by the prior year's sales volume. For example, if you sold 2,000 units last year and expect to sell 2,500 units this year, you're expecting a 25 percent increase in sales volume -- 500 divided by 2,000.
3. Project Sales Revenue
Multiply the amount of units you expect to sell by the price at which you expect to sell each unit. For example, if you plan to charge $50 per unit in the upcoming year, projected revenue is 2,500 multiplied by $50, or $125,000.
4. Project Expenses
To project expenses, you need to understand how costs behave. Separate your costs into variable, mixed and fixed costs and analyze each separately.
Variable expenses are directly correlated with sales volume. That means, if your sales volume is growing, these costs will grow at a proportional rate. Potential variable expenses include:
- Cost of goods sold, which is comprised of direct labor, direct materials and manufacturing overhead.
- Sales commissions.
- Credit card processing fees.
- Freight and shipping.
To calculate projected variable expenses, multiply the prior year's expenses for each line item by the projected increase in sales volume. For example, if variable expenses were $3,000 last year, projected variable costs would be 3,000 multiplied by 1.25, or $3,750
Mixed expenses can vary and increase along with production but they don't necessarily increase proportionally. At certain levels, they don't increase at all. Potential mixed costs include:
- Sales, customer service and operations salaries.
- Health insurance, workers' compensation and payroll taxes associated with increased salaries
- Professional fees, such as those for legal and accounting services.
- Utilities like phone, internet, energy and trash.
- Transportation and parking expenses.
Use your knowledge of business operations to project each mixed expense. For example, consider whether or not the increase in sales volume means you need to hire additional staff in sales, customer service and operations. Think about whether or not the increased activity will force you to upgrade your internet or phone plan, or if your accountant will bill you more now that you have increased transactions.
Fixed costs tend to stay the same even when production changes. Potential fixed costs include:
- Property taxes
- Business fees and licenses
- Business insurance
- Salaries for non-operational staff, like the president, human resources, administration and accounting.
- Office supplies
- Interest expense
Expect these costs to stay the same from year to year, unless you have an indication otherwise. For example, if you know that your rent is going to increase or that you'll have to buy a new office space, budget for these expenses. If you know you're going to buy new equipment, increase depreciation expense accordingly.
5. Create the Projected Income Statement
Using last year's income statement as a template, input your projections for each revenue and expense line item. Subtract total expenses from total revenues to arrive at projected net income and have a helpful profit forecast for your company. Date the document for the upcoming year and clearly label it Projected Income Statement so that no one who reads it confuses it with an actual income statement.