Business plan income statement is an important financial document, which shows a company's profitability in a given period of time.

Understanding an Income Statement

An income statement or a profit and loss statement helps to understand a company's sources of revenue and various items of expenses. In other words, it tells you where the money is coming from and where it's going. A glance at the income statement can tell anyone whether the business is profitable. Basically, an income statement lists out various items and amounts of revenue and expenses, with the net profit figure at the bottom.

You might have heard people talking about a company's bottom line. It's the last line in an income statement, which shows you the amount of net profit of a company in a given period of time after meeting all expenses.

This is the “profit” referred to in a profit and loss statement or the letter “P” of “P & L” account. The “loss” or “L” is the figure that appears if the total amount of expenses exceeds the total amount of revenue.

An income statement is probably the most common and standard financial statement. Another similar statement called the projected profit and loss statement is a standard financial projection tool used in business planning.

Breakdown of a Business Plan Income Statement

It's essential to include a projected income statement in your business plan. Whether you are planning for the internal purpose of the company or preparing a financial document to present before your investors, it's important to know whether you expect the business to be profitable over a specific period of time.

You should start a business plan with an executive summary, followed by other standard components. It must include a financial plan section, complete with a projected balance sheet, cash flow, and income statement. In business planning, the word “projected” is often replaced with the word “pro-forma,” but it means the same thing.

An income statement typically includes the following components:

  • Sales.
  • Direct cost of sales.
  • Production expenses.
  • Gross margin.
  • Operating expenses.
  • Marketing expenses.
  • Depreciation.
  • Utility expenses.
  • Insurance premiums.
  • Rent.
  • Payroll taxes.
  • Others.
  • Profit before interest and taxes.
  • Interest expenses.
  • Taxes.
  • Net profit.

Sales or Revenue

The top line in your income statement represents revenue from sales. It's the net sales amount remaining after deducting goods returns and sales discounts. All the direct expenses associated with sales will be deducted from this figure.

Direct Costs of Sales

The cost of goods sold includes all the direct costs incurred in making and delivering the products or services that contributed to sales. It does not include office rent, salaries, and other expenses that are not directly connected with sales.

Gross Margin or Gross Profit

Subtracting the direct cost of goods sold from the number of net sales gives you gross margin. This is the profit before considering operating expenses and taxes.

Operating Expenses

Except for the cost of goods sold, all other expenses necessary to run the business are covered under this head. Rent, utilities, payroll, and marketing costs are examples of operating expenses.

Operating expenses include marketing and administrative expenses like:

  • Sales salaries.
  • Collateral and promotions.
  • Advertising.
  • Travel, meetings, client meals, etc.
  • Office salaries.
  • Rent.
  • Utilities.

Operating Income

Operating income or earnings before interest, taxes, depreciation, and amortization (EBITDA) is the most reliable indicator of a company's profitability.

Interest

If the company is making any interest payments on a loan, it should be included under this head.

Total Expenses

This is the sum total of all expenses, excluding taxes and interest.

Depreciation and Amortization

These are the expenses incurred on tangible and intangible assets. Since the assets do not lose their utility in a single accounting period, the total cost of assets is spread over their total lifetime. The cost applicable for a single accounting period is deducted from revenue as depreciation.

Net Income Before Taxes

This figure represents total earnings of the business before paying income taxes.

Taxes

This item represents the amount of income tax paid or owed to the federal, state, and local governments. Some companies allocate an estimated amount of taxes they expect to pay in the future.

Net Income or Net Profit

This is the net profit of the business remaining after paying income taxes. This is the bottom line figure that tells at a glance whether a company is making profits or incurring losses.

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