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  • How to Use Your Business Plan Most Effectively
  • The Basics of Writing a Business Plan
  • 12 Reasons You Need a Business Plan
  • The Main Objectives of a Business Plan
  • What to Include and Not Include in a Successful Business Plan
  • The Top 4 Types of Business Plans
  • A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
  • 6 Tips for Making a Winning Business Presentation
  • 12 Ways to Set Realistic Business Goals and Objectives
  • 3 Key Things You Need to Know About Financing Your Business
  • How to Perfectly Pitch Your Business Plan in 10 Minutes
  • How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
  • How to Fund Your Business Using Banks and Credit Unions
  • How to Fund Your Business With an SBA Loan
  • How to Fund Your Business With Bonds and Indirect Funding Sources
  • How to Fund Your Business With Venture Capital
  • How to Fund Your Business With Angel Investors
  • How to Use Your Business Plan to Track Performance
  • How to Make Your Business Plan Attractive to Prospective Partners
  • Is This Idea Going to Work? How to Assess the Potential of Your Business.
  • When to Update Your Business Plan
  • How to Write the Management Team Section to Your Business Plan
  • How to Create a Strategic Hiring Plan
  • How to Write a Business Plan Executive Summary That Sells Your Idea
  • How to Build a Team of Outside Experts for Your Business
  • Use This Worksheet to Write a Product Description That Sells
  • What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
  • How to Raise Money With Your Business Plan
  • Customers and Investors Don't Want Products. They Want Solutions.
  • 5 Essential Elements of Your Industry Trends Plan
  • How to Identify and Research Your Competition
  • Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
  • How to Identify Market Trends in Your Business Plan
  • How to Define Your Product and Set Your Prices
  • How to Determine the Barriers to Entry for Your Business
  • How to Get Customers in Your Store and Drive Traffic to Your Website
  • How to Effectively Promote Your Business to Customers and Investors
  • What Equipment and Facilities to Include in Your Business Plan
  • How to Write an Income Statement for Your Business Plan
  • How to Make a Balance Sheet
  • How to Make a Cash Flow Statement
  • How to Use Financial Ratios to Understand the Health of Your Business
  • How to Write an Operations Plan for Retail and Sales Businesses
  • How to Make Realistic Financial Forecasts
  • How to Write an Operations Plan for Manufacturers
  • What Technology Needs to Include In Your Business Plan
  • How to List Personnel and Materials in Your Business Plan
  • The Role of Franchising
  • The Best Ways to Follow Up on a Buisiness Plan
  • The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
  • How to Hire the Right Business Plan Consultant
  • Business Plan Lingo and Resources All Entrepreneurs Should Know
  • How to Write a Letter of Introduction
  • What To Put on the Cover Page of a Business Plan
  • How to Format Your Business Plan
  • 6 Steps to Getting Your Business Plan In Front of Investors

How to Write an Income Statement for Your Business Plan Your income statement shows investors if you are making money. Here's everything you'll need to create one.

By Eric Butow • Oct 27, 2023

Key Takeaways

  • An income statement is your business's bottom line: your total revenue from sales minus all of your costs.

Opinions expressed by Entrepreneur contributors are their own.

This is part 2 / 11 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the description of the business concept and the management team. Astute investors look carefully at the charts, tables, formulas, and spreadsheets in the financial section because they know that this information is like the pulse, respiration rate, and blood pressure in a human being. It shows the condition of the patient. In fact, you'll find many potential investors taking a quick peek at the numbers before reading the plan.

Related: How to Make Realistic Financial Forecasts

Financial statements come in threes: income statement, balance sheet, and cash flow statement. Taken together they provide an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward. This information is very important to business plan readers.

Why You Need an Income Statement

In his article, How to Do a Monthly Income Statement Analysis That Fuels Growth , Noah Parsons writes: "In short, you use your income statement to fuel a greater analysis of the financial standing of your business. It helps you identify any top-level issues or opportunities that you can then dive into with forecast scenarios and by looking at elements of your other financial documentation.

Related: How to Make a Balance Sheet

You want to leverage your income statement to understand if you're performing better, worse or as expected. This is done by comparing it to your sales and expense forecasts through a review process known as plan vs actuals comparison. You then update projections to match actual performance to better showcase how your business will net out moving forward."

What Is In an Income Statement

An income statement shows whether you are making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line.

Related: How to Make a Cash Flow Statement

Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives. They can get pretty complicated in their attempt to capture sources of income, such as interest, and expenses, such as depreciation. But the basic idea is pretty simple: If you subtract costs from income, what you have left is profit.

To figure out your income statement, you need to gather a bunch of numbers, most of which are easily obtainable. They include your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general, and administrative (SG&A) expenses; what you paid out in interest and dividends, if anything; and your corporate tax rate. If you have those, you're ready to go.

Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard

Sales and Revenue

Revenue is all the income you receive from selling your products or services as well as from other sources such as interest income and sales of assets.

Gross Sales

Your sales figure is the income you receive from selling your product or service. Gross sales equals total sales minus returns. It doesn't include interest or income from sales of assets.

Interest and Dividends

Most businesses have a little reserve fund they keep in an interest-bearing bank or money market account. Income from this fund, as well as from any other interest-paying or dividend-paying securities they own, shows up on the income statement just below the sales figure.

Related: How to Measure Franchise Success With Your Income Statement

Other Income

If you finally decide that the branch office out on County Line Road isn't ever going to turn a decent profit, and you sell the land, building, and fixtures, the income from that sale will show up on your income statement as "other income." Other income may include sales of unused or obsolete equipment or any income-generating activity that's not part of your main line of business.

Costs come in all varieties—that's no secret. You'll record variable costs, such as the cost of goods sold, as well as fixed costs—rent, insurance, maintenance, and so forth. You'll also record costs that are a little trickier, the prime example being depreciation.

Related: How to Use Financial Ratios to Understand the Health of Your Business

Cost of Goods Sold

Cost of goods sold, or COGS, includes expenses associated directly with generating the product or service you're selling. If you buy smartphone components and assemble them, your COGS will include the price of the chips, screen, and other parts, as well as the wages of those doing the assembly. You'll also include supervisor salaries and utilities for your factory. If you're a solo professional service provider, on the other hand, your COGS may amount to little more than whatever salary you pay yourself and whatever technology you may use for your business.

Related: My Company Hears Hundreds of Pitches Every Year — Here's What Investors Are Actually Looking For.

Sales, General, and Administrative Costs

You have some expenses that aren't closely tied to sales volume, including salaries for office personnel, salespeople compensation, rent, insurance, and the like. These are split out from the sales-sensitive COGS figure and included on a separate line.

Depreciation

Depreciation is one of the most baffling pieces of accounting wizardwork. It's a paper loss, a way of subtracting over time the cost of a piece of equipment or a building that lasts many years even though it may get paid for immediately.

Related: 10 Mistakes to Avoid When Pitching Investors (Infographic)

Depreciation isn't an expense that involves cash coming out of your pocket. Yet it's a real expense in an accounting sense, and most income statements will have an entry for depreciation coming off the top of pretax earnings. It refers to an ongoing decrease in asset value.

If you have capital items that you are depreciating, such as an office in your home or a large piece of machinery, your accountant will be able to set up a schedule for depreciation. Each year, you'll take a portion of the purchase price of that item off your earnings statement. Although it hurts profits, depreciation can reduce future taxes.

Paying the interest on loans is another expense that gets a line all to itself and comes out of earnings just before taxes are subtracted. This line doesn't include payments against the principal. Because these payments result in a reduction of liabilities—which we'll talk about in a few pages in connection with your balance sheet—they're not regarded as expenses on the income statement.

Related: How to Craft a Business Plan That Will Turn Investors' Heads

The best thing about taxes is that they're figured last, on the profits that are left after every other thing has been taken out. Tax rates vary widely according to where your company is located, how and whether state and local taxes are figured, and your special tax situation. Use previous years as a guidepost for future returns. If you are just opening your business, work carefully with your accountant to set up a system whereby you can pay the necessary taxes at regular intervals.

Buzzword: EBIT

EBIT stands for earnings before interest and taxes. It is an indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest.

Related: Don't Make This Huge Mistake on Your Financial Model

Important Plan Note

Don't confuse sales with receipts. Your sales figure represents sales booked during the period, not necessarily money received. If your customers buy now and pay later, there may be a significant difference between sales and cash receipts.

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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Free Small Business Income Statements, Spreadsheets, and Templates

By Andy Marker | April 6, 2022

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We’ve compiled a collection of the most helpful small business income statements, worksheets, and templates for small business owners and other stakeholders, free to download. 

Included on this page, you’ll find a small business income statement template , a small business balance sheet and income statement template , a simple small business cash flow template , and a small business comparative income statement . Plus, you’ll find helpful tips on using a small business income statement template .

Printable Small Business Income and Expenses Template

Printable Small Business Income and Expenses Template

Download Printable Small Business Income and Expenses Template Microsoft Excel | Microsoft Word | Adobe PDF | Google Sheets

Use this printable small business income and expenses template to determine your net income over a period of time. Enter values into the customizable line-item rows, and the template will calculate your revenue and cost of goods sold (COGS) to determine your gross profit. Enter your expenses (such as rent, utilities, and office supplies) to see your total net income. This template is a great tool to track your business's finances over time. 

Read our article on free small business expense templates to find additional resources and to get the most out of your small business budgeting.

Yearly Small Business Income Statement Template

Yearly Small Business Income Statement Template

Download Yearly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this yearly small business income statement template to manage your profit and losses over a three-year timeline. Track your costs in the customizable Expenses column, and enter your revenue and expenses to determine your net income. The template also includes a built-in tax rate calculator for a more accurate account of your net profit. 

To find more resources, check out our comprehensive roundup of free profit and loss templates .

Monthly Small Business Income Statement Template

Monthly Small Business Income Statement Template

Download Monthly Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this monthly small business income statement template to track and manage your small business finances. Enter the number of customers and the average sale per customer to determine your total monthly sales. Then, enter your operating, payroll, and office expenses to determine your total expenses. The template will automatically calculate these totals to show your net profit.

Sample Small Business Income Statement Template

Sample Small Business Income Statement Template

Download Sample Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this simple small business income statement template for an overall analysis of your net income. You can customize the Revenue and Expenses lines to include items specific to your business; additionally, the template includes a Years Represented column that allows you to compare numbers over a two-year timeline. This is the perfect tool for taking a quick snapshot of your business cash flow. 

To find more resources, check out our small business budget templates.

Printable Monthly Small Business Income and Expenses Worksheet Template

Printable Monthly Small Business Income and Expenses Worksheet Template

Download Printable Monthly Small Business Income and Expenses Worksheet Template Microsoft Excel | Adobe PDF | Google Sheets

This simple, printable template is the perfect tool for tracking your business’s income, expenses, and transactions. The template includes three separate worksheets — simply enter monthly financial data, and the template will automatically calculate yearly totals. Help ensure you meet your financial goals, accurately predict projections, and make necessary adjustments with this template.

Freelance Income Statement Template

Freelance Income Statement Template

Download Freelance Income Statement Template Microsoft Excel | Google Sheets

Self-employed individuals can use this template to track their business income from clients, along with any business expenses. Enter your personalized expenses, including rent, office supplies, and insurance, to see your cash outflow. Then, enter your taxes, and the template will automatically calculate your net income. This is a must-have tool for small business owners looking to understand their business profits.

Daily Income and Expenditure Template for Small Business

Daily Income and Expenditure Template for Small Business

Download Daily Income and Expenditure Template for Small Business Microsoft Excel | Google Sheets

For a daily analysis of your small business’s cash flow, use this template to track cash receipts, cash payments, and operating expenses. The template automatically calculates these totals on a daily basis to provide you with a detailed financial report. The template also shows your monthly ending cash position, so you can avoid any shortcomings. 

Check out our profit and loss templates for more resources on tracking your business’s cash flow.

Small Business Balance Sheet and Income Statement Template

Small Business Balance Sheet and Income Statement Template

Download Small Business Balance Sheet and Income Statement Template Microsoft Excel | Google Sheets

Use this income and expenses spreadsheet to help ensure that you never lose sight of your small business’s financial outlook. Enter your revenue and expenses, and the template will automatically calculate your net income. Plus, the customizable year columns enable you to compare your net income over a five-year timeline so that you can easily forecast your business’s economic health. 

Read our article on small business balance sheet templates for more resources on tracking your business expenses.

Small Business Income Statement Template

Small Business Income Statement Template

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

This simple small business income statement template calculates your total revenue and expenses, including advising, equipment, and employee benefits, to determine your net income. Use this template to track and compare your finances over a two-year timeline. Save the document so that you always have quick insight into the financial status of your business.

Startup Business Income and Expenses Template

Startup Business Income and Expenses Template

Download Startup Business Income and Expenses Template Microsoft Excel | Adobe PDF | Google Sheets

Use this startup business income and expenses template to track your business’s cash flow. Compare your budgeted expenses and funding to your actual spending to understand any discrepancies. Overall, this template can help you make well-informed, financially accurate predictions so that you can reach your business goals.

Simple Small Business Cash Flow Template

Simple Small Business Cash Flow Template

Download Simple Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this simple small business cash flow template to monitor your cash increase or decrease over a certain period of time. Enter your cash receipts, payments, COGS, and operating expenses, and the built-in formulas will calculate your total cash payments, net cash change, and month-ending cash position.

Simple Small Business Profit and Loss Template

Simple Small Business Profit and Loss Template

Download Simple Small Business Profit and Loss Template Microsoft Excel | Google Sheets

Regardless of your industry, you can use this simple small business profit and loss template to analyze your business’s financial status over a specific period of time. Customize your expenses by adding or removing line items, and the built-in formulas will calculate your gross profit and net income. 

Read our article on small business profit and loss templates to find additional resources and to get the most out of your small business’s profit and loss tracking.

Small Business Comparative Income Template

Small Business Comparative Income Template

Download Small Business Comparative Income Template Microsoft Excel | Google Sheets

Use this detailed small business comparative template to closely maintain watch over your financial position. Enter line items for income and expenses to compare your budget to actual calculations. With detailed use, this template will enable you to never lose sight of your business's cash flow.

What Is a Small Business Income Statement Template?

A small business income statement template is a financial statement used to report performance. Templates include calculations for revenue, expenses, and overall profit and loss, and they are used to document, analyze, and project business finances. 

If you are a current or prospective small business owner, it’s imperative that you track your income and expenses, as doing so will ensure you have accurate information regarding how your company spends and makes money. An income statement template helps you to identify areas of risk and patterns in profit and loss, and to make educated decisions around your budget. 

A small business income statement template typically includes the following line items for tracking your business's financial status: 

  • Budget: A budget is a spending plan for your business based on your estimated income and expenses.
  • Cash Ending Position: This refers to the money your business has at any specific point in time. 
  • Cash Flow: This is the amount of money that moves in and out of your business. 
  • Cost of Goods Sold (COGS): This is any money spent that is associated with your product, such as packaging and labor.
  • Expenses: List anything on which you spend money to run your business, such as rent, advertising, equipment, insurance, phone, and employee salaries. 
  • Gross Profit: Determine this number by subtracting the COGS from your total sales.
  • Gross Revenue: The formula to calculate gross revenue is total revenue less the COGS. 
  • Income: List anything that brings money into your business, such as sales and donations. 
  • Net Income or Net Profit: This number reflects the amount earned from sales.
  • Revenue: Calculate revenue by adding together the total amount of income made by sales and services. 
  • Tax: This includes any mandatory monetary contributions made to the government.

Manage Income Statements and Drive Success with Smartsheet for Small Businesses

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With Smartsheet, you can align your team on strategic initiatives, improve collaboration efforts, and automate repetitive processes, giving you the ability to make better business decisions and boost effectiveness as you scale. 

When you wear a lot of hats, you need a tool that empowers you to get more done in less time. Smartsheet helps you achieve that. Try free for 30 days, today .

Connect your people, processes, and tools with one simple, easy-to-use platform.

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How to Prepare an Income Statement

Business professional preparing an income statement

  • 09 Dec 2021

When it comes to financial statements , each communicates specific information and is needed in different contexts to understand a company’s financial health.

The income statement is one of the most important financial statements because it details a company’s income and expenses over a specific period. This document communicates a wealth of information to those reading it—from key executives and stakeholders to investors and employees. Being able to read an income statement is important, but knowing how to generate one is just as critical.

Here’s an overview of the information found in an income statement, along with a step-by-step look at the process of preparing one for your organization.

Access your free e-book today.

What Is an Income Statement?

An income statement is a financial report detailing a company’s income and expenses over a reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically prepared quarterly or annually.

Income statements depict a company’s financial performance over a reporting period. Because the income statement details revenues and expenses, it provides a glimpse into which business activities brought in revenue and which cost the organization money—information investors can use to understand its health and executives can use to find areas for improvement.

Related: How to Read & Understand an Income Statement

An income statement typically includes the following information:

  • Revenue: How much money a business took in during a reporting period
  • Expenses: How much money a business spent during a reporting period
  • Costs of goods sold (COGS): The total costs associated with component parts of whatever product or service a company makes and sells
  • Gross profit: Revenue minus costs of goods sold
  • Operating income: Gross profit minus operating expenses
  • Income before taxes: Operating income minus non-operating expenses
  • Net income: Income before taxes
  • Earnings per share (EPS): Net income divided by the total number of outstanding shares
  • Depreciation: Value lost by assets, such as inventory, equipment, and property, over time
  • EBITDA: Earnings before interest, depreciation, taxes, and amortization

Related: 13 Financial Performance Measures Managers Should Monitor

Steps to Prepare an Income Statement

1. choose your reporting period.

Your reporting period is the specific timeframe the income statement covers. Choosing the correct one is critical.

Monthly, quarterly, and annual reporting periods are all common. Which reporting period is right for you depends on your goals. A monthly report, for example, details a shorter period, making it easier to apply tactical adjustments that affect the next month’s business activities. A quarterly or annual report, on the other hand, provides analysis from a higher level, which can help identify trends over the long term.

2. Calculate Total Revenue

Once you know the reporting period, calculate the total revenue your business generated during it.

If you prepare the income statement for your entire organization, this should include revenue from all lines of business. If you prepare the income statement for a particular business line or segment, you should limit revenue to products or services that fall under that umbrella.

3. Calculate Cost of Goods Sold (COGS)

Next, calculate the total cost of goods sold for any product or service that generated revenue for your business during the reporting period. This encompasses direct and indirect costs of producing and selling products or services, including:

  • Direct labor expenses
  • Material expenses
  • Parts or component expenses
  • Distribution costs
  • Any expense directly tied to the production of your product or service

4. Calculate Gross Profit

The next step is to determine gross profit for the reporting period. To calculate this, simply subtract the cost of goods sold from revenue.

Financial Accounting| Understand the numbers that drive business success | Learn More

5. Calculate Operating Expenses

Once you know gross profit, calculate operating expenses (OPEX).

Operating expenses are indirect costs associated with doing business. These differ from cost of goods sold because they’re not directly associated with the process of producing or distributing products or services. Examples of expenses that fall under the OPEX category include:

  • Office supplies

6. Calculate Income

To calculate total income, subtract operating expenses from gross profit. This number is essentially the pre-tax income your business generated during the reporting period. This can also be referred to as earnings before interest and taxes (EBIT).

7. Calculate Interest and Taxes

After calculating income for the reporting period, determine interest and tax charges.

Interest refers to any charges your company must pay on the debt it owes. To calculate interest charges, you must first understand how much money you owe and the interest rate being charged. Accounting software often automatically calculates interest charges for the reporting period.

Next, calculate your total tax burden for the reporting period. This includes local, state, and federal taxes, as well as any payroll taxes.

8. Calculate Net Income

The final step is to calculate net income for the reporting period. To do this, subtract interest and then taxes from your EBIT. The number remaining reflects your business’s available funds, which can be used for various purposes, such as being added to a reserve, distributed to shareholders, utilized for research and development, or to fuel business expansion.

Income Statement Example

Below is an example income statement for a fictional company. As you can see at the top, the reporting period is for the year that ended on Sept. 28, 2019.

Sample Income Statement, followed by a link to an alternative version

Go to the alternative version .

During the reporting period, the company made approximately $4.4 billion in total sales. It cost the business approximately $2.7 billion to achieve those sales. As a result, gross profit was about $1.6 billion.

Next, $560.4 million in selling and operating expenses and $293.7 million in general administrative expenses were subtracted. This left the company with an operating income of $765.2 million. To this, additional gains were added and losses subtracted, including $257.6 million in income tax.

At the bottom of the income statement, it’s clear the business realized a net income of $483.2 million during the reporting period.

Credential of Readiness | Master the fundamentals of business | Learn More

A Critical Skill for Business Leaders

Although the income statement is typically generated by a member of the accounting department at large organizations, knowing how to compile one is beneficial to a range of professionals.

Whether you’re an individual contributor, a member of the leadership team in a non-accounting role, or an entrepreneur who wears many hats, learning how to create an income statement can provide a deeper understanding of the financial metrics that matter to your business. It can also help improve your financial analysis capabilities .

Do you want to take your career to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —which can teach you the key financial topics you need to understand business performance and potential. Not sure which course is right for you? Download our free flowchart .

Data Tables

Company b income statement.

For Year Ended September 28, 2019 (In thousands)

Go back to the article .

income statement for business plan

About the Author

Business Plan Income Statement: Everything You Need to Know

Business plan income statement is an important financial document, which shows a company's profitability in a given period of time. 3 min read updated on February 01, 2023

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:

  • Direct cost of sales.
  • Production expenses.
  • Gross margin.
  • Operating expenses.
  • Marketing expenses.
  • Depreciation .
  • Utility expenses.
  • Insurance premiums.
  • Payroll taxes .
  • Profit before interest and taxes.
  • Interest expenses.
  • 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.

Operating Income

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

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.

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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How to Create a Profit and Loss Forecast

Female entrepreneur sitting in her home office reviewing her profit and loss statement.

Angelique O'Rourke

7 min. read

Updated October 27, 2023

An income statement, also called a profit and loss statement (or P&L), is a fundamental tool for understanding how the revenue and expenses of your business stack up.

Simply put, it tells anyone at-a-glance if your business is profitable or not. Typically, an income statement is a list of revenue and expenses, with the company’s net profit listed at the end (check out the  section on income statement examples below  to see what it looks like). 

Have you ever heard someone refer to a company’s “bottom line”? They’re talking about the last line in an income statement, the one that tells a reader the net profit of a company, or how profitable the company is over a given period of time (usually quarterly or annually) after all expenses have been accounted for.

This is the “profit” referred to when people say “profit and loss statement,” or what the “p” stands for in “P & L.” The “loss” is what happens when your expenses exceed your revenue; when a company is not profitable and therefore running at a loss.

As you read on, keep in mind that cash and profits aren’t the same thing. For more on how they’re different,  check out this article .

What’s included in an income statement?

The top line of your profit and loss statement will be the money that you have coming in, or your revenue from sales. This number should be your initial revenue from sales without any deductions.

The top line of your income statement is really just as important as the bottom line; all of the direct costs and expenses will be taken out of this beginning number. The smaller it is, the smaller the expenses have to be if you’re going to stay in the black.

If you’re  writing a business plan  document and don’t yet have money coming in, you might be wondering how you would arrive at a sales number for a financial forecast. It’s normal for the financials of a business plan to be your best educated guess at what the next few years of numbers will be. No one can predict the future, but you can make a reasonable plan.

Check out this article about forecasting sales  for more information.

Direct costs

Direct costs, also referred to as the cost of goods sold, or COGS, is just what it sounds like: How much does it cost you to make the product or deliver the service related to that sale? You wouldn’t include items such as rent for an office space in this area, but the things that directly contribute to the product you sell.

For example, to a bookstore, the direct cost of sales is what the store paid for the books it sold; but to a publisher, its direct costs include authors’ royalties, printing, paper, and ink. A manufacturer’s direct costs include materials and labor. A reseller’s direct costs are what the reseller paid to purchase the products it’s selling.

If you only sell services, it’s possible that you have no direct costs or very low direct costs as a percentage of sales; but even accountants and attorneys have subcontractors, research, and photocopying that can be included in direct costs.

Here’s a simple rule of thumb to distinguish between direct costs and regular expenses: If you pay for something, regardless of whether you make 1 sale or 100 sales, that’s a regular expense. Think salaries, utilities, insurance, and rent. If you only pay for something when you make a sale, that’s a direct cost. Think inventory and paper reports you deliver to clients.

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Gross margin

Gross margin is also referred to as gross profit. This number refers to the difference between the revenue and direct costs on your income statement.

Revenue – Direct Costs = Gross Margin

This number is very important because it conveys two critical pieces of information: 1.) how much of your revenue is being funneled into direct costs (the smaller the number, the better), and 2.) how much you have left over for all of the company’s other expenses. If the number after direct costs is smaller than the total of your operating expenses, you’ll know immediately that you’re not profitable.

Operating expenses

Operating expenses are where you list all of your regular expenses as line items, excluding your costs of goods sold.

So, you have to take stock of everything else your company pays for to keep the doors open: rent, payroll, utilities, marketing—include all of those fixed expenses here.

Remember that each individual purchase doesn’t need its own line item. For ease of reading, it’s better to group things together into categories of expenses—for example, office supplies, or advertising costs.

Operating income

Operating income is also referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization. You calculate your operating income by subtracting your total operating expenses from your gross margin.

Gross Margin – Operating Expenses = Operating Income

Operating income is considered the most reliable number reflecting a company’s profitability. As such, this is a line item to keep your eye on, especially if you’re  presenting to investors . Is it a number that inspires confidence?

This is fairly straightforward—here you would include any interest payments that the company is making on its loans. If this doesn’t apply to you, skip it.

Depreciation and amortization

These are non-cash expenses associated with your assets, both tangible and intangible. Depreciation is an accounting concept based on the idea that over time, a tangible asset, like a car or piece of machinery, loses its value, or depreciates. After several years, the asset will be worth less and you record that change in value as an expense on your P&L.

With intangible assets, you’ll use a concept called amortization to write off their cost over time. An example here would be a copyright or patent that your business might purchase from another company. If the patent lasts for 20 years and it cost your company $1 million to purchase the patent, you would then expense 1/20th of the cost every year for the life of the patent. This expense for an intangible asset would be included in the amortization row of the income statement.

This will reflect the income tax amount that has been paid, or the amount that you expect to pay, depending on whether you are recording planned or actual values. Some companies  set aside an estimated amount of money  to cover this expected expense.

Total expenses

Total expenses is exactly what it sounds like: it’s the total of all of your expenses, including interest, taxes, depreciation, and amortization.

The simplest way to calculate your total expenses is to just take your direct costs, add operating expenses, and then add the additional expenses of interest, taxes, depreciation, and amortization:

Total Expenses = Direct Costs + Operating Expenses + Interest + Taxes + Depreciation + Amortization

Net profit, also referred to as net income or net earnings, is the proverbial bottom line. This is the at-a-glance factor that will determine the answer to the question, are you in the red? You calculate net profit by subtracting total expenses from revenue:

Net Profit = Revenue – Total Expenses

Remember that this number started at the top line, with your revenue from sales. Then everything else was taken out of that initial sum. If this number is negative, you’ll know that you’re running at a loss. Either your expenses are too high, you’re revenue is in a slump, or both—and it might be time to reevaluate strategy.

  • Income statement examples

Because the terminology surrounding income statements is variable and all businesses are different, not all of them will look exactly the same, but the core information of revenue minus all expenses (including direct costs) equals profit will be present in each one.

Here is an income statement from Nike, to give you a general idea:

Nike income statement

An  income statement from Nike .

As you can see, while Nike uses a variety of terms to explain what their expenses are and name each line item as clearly as possible, the takeaway is still the bottom line, their net income.

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Content Author: Angelique O'Rourke

Angelique is a skilled writer, editor, and social media specialist, as well as an actor and model with a demonstrated history of theater, film, commercial and print work.

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Table of Contents

  • What’s included in an income statement?

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Small Business Trends

Your income statement guide: examples, advice and definitions.

Having a solid understanding of your income statement is one of the most important steps you can take as a business owner. This guide provides detailed examples, guidance, and definitions to help you understand how to accurately create an income statement for your business.

By reading this guide, you’ll learn what information should go in your income statement, how to read and interpret it, and how to use it in the future. Let’s get started!

Table of Contents

What is an Income Statement?

An income statement, which is a part of financial accounting and also known as a profit and loss statement, is a document that provides information about the profitability of a business.

It reports the revenues generated in a given period of time, as well as the expenses incurred in order to generate those revenues. The difference between the two is known as net income or profit. As an important part of your overall financial statements, the income statement helps you assess how well your business is doing and make decisions about how to improve it going forward.

An income statement, along with a business plan, are important documents for obtaining financing. Make sure to research how to write a business plan and what is financial accounting as you prepare your income statement.

income statement

What are Income Statements Used for?

Having an understanding of your income statement is essential for any business owner. Income statements are used for a variety of purposes, including tracking income and expenses, making budget forecasts, calculating taxes, and gauging profitability. The following are the five main uses of an income statement:

  • Tracking Income and Expenses. The most basic use of an income statement is to track the amount of income generated in comparison to the costs incurred to generate that revenue. This enables you to gain a better understanding of how your business is performing financially and identify areas where improvements can be made.
  • Making Budget Forecasts. An income statement can also be used to create budget forecasts for the upcoming year. This allows you to plan ahead for potential revenue streams as well as anticipate expenses and costs associated with those revenues.
  • Calculating Taxes. Your income statement will also be used by the IRS when it comes time to file taxes for your business. Providing detailed information about your total profits or losses makes tax calculations much easier and more accurate.
  • Gauging Profitability. An income statement provides key insight into how profitable your business has been over a certain period of time by comparing total revenues against total expenses. This information can then be used to make changes in order to improve profitability going forward.
  • Assessing Performance. Lastly, an income statement can help you assess overall performance within the company by evaluating how efficient each department or individual is at generating revenues or cutting costs within your organization structure.

Here’s a quick word from “Accounting Stuff” that explains income statements to beginners:

Why Income Statements are So Important

income statement charts and graphs

Having an understanding of your income statement is essential for any business owner. Here are four reasons why income statements are so important:

  • Measuring Performance. An income statement provides key insights into how well you’ve been performing financially over a given period of time. By comparing total revenues against total expenses, you can see whether or not you’re achieving your goals and make changes as needed to improve your results moving forward.
  • Assessing Growth. Income statements also help you measure the growth and sustainability of your business by providing detailed information about revenue streams, costs, and profits over the course of a year or more. This enables you to assess the health of your company in order to make wiser decisions when it comes time to reinvest in new products or services and expand markets.
  • Reducing Risk. An income statement also helps reduce risk by providing accurate data about where money is being spent as well as which areas are generating the most profit or incurring losses. This helps you avoid making costly mistakes or investing in areas that may not yield a return on investment down the road.
  • Planning Ahead. Lastly, income statements enable businesses to plan ahead by providing detailed financial information that can be used to create reliable budget forecasts for upcoming years as well as anticipate potential costs associated with those projects or investments before they occur.

income statement for business plan

What Goes on an Income Statement? The Main Components

When preparing an income statement, you need to include several key components. These components will help provide insight into your company’s financial performance by providing detailed information on revenue, expenses, and net income. Here is a list of the main components that go on an income statement:

Revenue is the total amount of money earned from the sale of goods or services for a given period of time. It includes sales from products and services as well as any other source of income such as interest and dividends.

Cost of Goods Sold (COGS)

Costs of goods sold (COGS) include expenses directly related to producing a product or providing a service. This includes costs such as materials, labor, shipping, and taxes associated with production.

Gross Profit

Gross profit is the total amount of money earned after COGS has been deducted from the total revenue. It’s a measure of how much money is left over after production costs have been covered.

Marketing, Advertising, and Promotion Expenses

Marketing, advertising, and promotion expenses are costs associated with promoting a product or service. This includes any money spent on advertising, paid search campaigns, website design and hosting, public relations services, and other promotional activities.

General and Administrative Operating Expenses

General and administrative expenses are costs associated with running a business. This includes wages, rent, utilities, insurance premiums, legal fees, and other costs incurred during the course of operations.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a measure of the operating performance of a business that excludes non-operating expenses such as debt payments and taxes. It’s calculated by subtracting total operating expenses from total revenue.

Depreciation and Amortization Expenses

Depreciation and amortization are non-cash expenses that account for the decrease in the value of long-term assets such as equipment, buildings, and furniture.

Operating Income or EBIT

Operating income or EBIT stands for earnings before interest and taxes. It’s calculated by subtracting total operating expenses from total revenue, excluding non-operating items such as depreciation and amortization. This is a measure of the company’s operating performance from its core business operations.

Interest Expense

If you’ve ever researched how to get a small business loan , then you know interest expense is the cost of borrowing funds from lenders. This includes interest payments made on loans and other debts.

Income Tax Expense

Income taxes are the amount of money a business pays in taxes based on its profits. This includes any applicable federal, state, and local taxes that must be paid.

Other Expenses

Other expenses include any additional costs that are not part of the main components listed above. This can include things like bad debt expenses and one-time costs.

Net income is the end result after subtracting all operating expenses from revenue and adding any non-operating income. This is also referred to as net profit or loss depending on whether it is positive or negative.

income statement for business plan

How to Prepare an Income Statement

Preparing an income statement, also known as a profit and loss statement, is a crucial task for businesses of all sizes.

It’s a financial document that records a company’s revenues, expenses, and profitability over a specific time period, giving an overall view of the company’s financial health and operational efficiency. Here’s an expanded look at how you can prepare an income statement:

  • Gather Financial Data: Start by collecting all of your company’s financial data for the period in question. This includes all revenue sources, such as sales figures and any other income, along with all costs and expenses. For larger companies, this information may be stored in accounting software or financial databases, while smaller businesses may keep track of these numbers in a spreadsheet or even a paper ledger.
  • Calculate Revenues: Once you’ve collected all relevant data, the first line of the income statement will be the total revenue earned over the period. This includes sales revenues and any other income sources such as investment income or proceeds from asset sales. Make sure to include all forms of revenue when calculating this figure.
  • Calculate Cost of Goods Sold (COGS): This figure represents the direct costs associated with creating the goods or services that your company sells. This includes the cost of raw materials, direct labor costs, and any other direct costs associated with the production process. Deducting COGS from total revenue gives you your gross profit.
  • Calculate Gross Profit: Gross profit is calculated by subtracting COGS from total revenues. This figure gives a broad view of how much money your company has made from its core operations before other expenses are taken into account.
  • Calculate SG&A Expenses: Selling, General, and Administrative (SG&A) expenses are the indirect costs of running a business, and can include expenses such as salaries, rent, utilities, office supplies, marketing costs, and more. It’s important to track and record these expenses accurately, as they significantly impact the company’s profitability.
  • Deduct SG&A from Gross Profit: After calculating the SG&A expenses, deduct them from the gross profit. The resulting figure is known as Operating Income or Operating Profit, representing the profits earned from normal business operations.
  • Add Interest Expense: If your company has taken out loans or has other forms of debt, you’ll likely have interest expenses. These need to be accounted for on the income statement, and are generally subtracted from the Operating Income to give a figure known as Income Before Taxes (EBT).
  • Apply Income Tax Expense: Next, calculate the income tax your company owes based on its taxable income. This figure is deducted from the EBT to arrive at the final line on the income statement – the Net Income.
  • Calculate Net Income: The Net Income represents the company’s total earnings, or net profit, for the period after all costs, expenses, interest, and taxes have been deducted. This is often referred to as the “bottom line” and is a key indicator of the company’s profitability.

Understanding how to prepare an income statement is essential for business owners. This statement not only provides a snapshot of your company’s financial health, but it can also help you make informed decisions about how to increase profitability, cut costs, and drive growth.

Next, let’s look at some income statement examples.

Income Statement Examples

If you’re looking to get a better understanding of what an income statement looks like, studying examples can be very helpful. Here are examples of two different types of income statements:

Single-step Income Statement Example

A single-step income statement presents all of a company’s revenues and expenses as one lump sum. It doesn’t provide separate line items for operating, nonoperating or extraordinary items, so it provides only a basic overview of the company’s financial performance.

income statement for business plan

Multi-step Income Statement Example

A multi-step income statement presents revenues and expenses in separate line items for operating, nonoperating or extraordinary items. This kind of statement provides a more detailed view of the company’s financial performance, as it breaks down each category of revenue and expense.

income statement for business plan

How to Analyze an Income Statement

analyzing an income statement

Analyzing an income statement, also referred to as a profit and loss statement, is essential for understanding a company’s financial performance and making sound business decisions. The statement provides detailed information about revenues, costs, and expenses, allowing stakeholders to evaluate profitability and identify trends.

Before you get into the nitty-gritty of things, here’s a summary table of the steps.

Here’s the comprehensive guide on how to analyze an income statement:

  • Understanding the Purpose and Structure of the Income Statement: Before diving into analysis, it’s crucial to comprehend the purpose of an income statement and its structure. An income statement provides an overview of a company’s revenues, expenses, and profits over a particular period. It’s structured in a way that starts with revenue, from which costs of goods sold (COGS) are deducted to derive gross profit. Subsequent deductions for operating expenses result in operating profit. After accounting for interest and taxes, we arrive at the net income.
  • Comparing the Current Annual Income Statement to Past Statements: One of the most effective ways to analyze an income statement is to compare it with past statements. This comparison, known as a horizontal analysis, can help identify trends, growth rates, and any significant changes in income, costs, or expenses over time.
  • Analyzing Each Line Item in the Income Statement: A thorough analysis involves a detailed review of each line item. Look for substantial changes or anomalies that could indicate an issue that needs further investigation. It might be changes in cost of sales, operating expenses, or perhaps an unusual non-operating expense.
  • Calculating Key Financial Ratios: Financial ratios are powerful tools for understanding a company’s financial performance and comparing it to industry peers. Ratios like gross margin (Gross Profit/Revenue), operating margin (Operating Profit/Revenue), and net profit margin (Net Income/Revenue) provide insights into how effectively the company is managing its costs and generating profit. Other important ratios might include the current ratio and the quick ratio, which help assess a company’s short-term liquidity.
  • Analyzing Non-Operating Items: Non-operating items such as interest expenses, taxes, and one-off items can significantly impact a company’s net income. It’s important to evaluate these line items and understand their effects on the company’s profitability. For instance, a significant one-time expense could result in a net loss for the period, but it may not be indicative of poor financial performance if the company’s operating profit remains strong.
  • Assessing the Company’s Financial Sustainability: After analyzing the income statement, you should have a good understanding of whether the company’s current levels of activity are sustainable. Look at trends in revenues and costs – is the company growing sales faster than expenses? Is the net income trending positively over time? By comparing the company’s income statement to its balance sheet and cash flow statement, you can get a comprehensive view of its financial health and sustainability.

Leveraging Technology Tools and Software Solutions

Tools such as spreadsheets, accounting software, and financial analysis tools can be used to help analyze an income statement and understand a company’s financial performance.

Spreadsheets allow users to manipulate data by creating balance sheets and income statements that visualize the data in multiple formats, making it easier to identify trends over time.

Accounting software automates processes such as tracking expenses, generating invoices, and entering journal entries, which helps streamline the analysis process.

Finally, financial analysis tools provide sophisticated charting capabilities for visualizing key financial ratios such as operating margin or return on assets.

Other Financial Statements

cash flow

Inevitably, understanding a company’s financial performance requires analysis of more than just the income statement. Analyzing other key financial statements such as the balance sheet and statement of cash flows can also provide valuable insights into a company’s overall financial situation.

Be sure to research what is a cash flow statement and what is a balance sheet to improve the accuracy of your analysis and get the most complete picture of a company’s financial standing.

Income Statement Vs. Balance Sheet

The income statement and balance sheet are two of the main financial statements used by businesses to report on their performance. The income statement reports a company’s revenues, expenses, and net profits or losses over a specified period.

The balance sheet, on the other hand, provides an overview of the company’s financial position at a given moment in time. It lists assets and liabilities as well as equity. Both statements provide important information for understanding the overall financial health of a business.

income statement for business plan

Using Your Income Statement to Create a Financial Plan

Creating a financial plan using your income statement is an important step in planning for future success. By analyzing your income statement, you can identify opportunities for increasing revenue and reducing expenses.

This will help you identify areas that need improvement and help you manage cash flow more efficiently. Furthermore, having a clear understanding of your financials before making decisions helps reduce risk and ensure that the decisions you make are beneficial to the long-term success of your business.

Financial planning is important because it allows businesses to set goals, measure progress and make necessary changes to reach those goals.

The Role of Income Statements in Business Decision-Making

Income statements play a crucial role in guiding business decisions. By providing a clear picture of profitability and financial health, these statements enable business owners and managers to make informed decisions about various aspects of their operations.

How Income Statements Influence Business Strategy

  • Resource Allocation: Income statements reveal which areas of a business are most profitable. This insight helps in allocating resources more effectively, ensuring that they are invested in the most lucrative segments of the business.
  • Cost Management: By identifying the major cost drivers in the business, income statements help in strategizing cost-cutting measures without compromising on product or service quality.
  • Pricing Strategies: Understanding the profitability from the income statement helps businesses in setting the right price for their products or services, balancing competitiveness with profitability.

Advanced Analysis Techniques for Income Statements

Advanced analysis of income statements involves going beyond the basic examination of revenues and expenses. It includes techniques like ratio analysis and trend analysis, which provide deeper insights.

Techniques for Deeper Financial Analysis

  • Trend Analysis: This involves comparing income statements over several periods to identify patterns or trends in revenue growth, expense management, and overall profitability.
  • Ratio Analysis: Key financial ratios like the gross profit margin, operating margin, and net profit margin, when calculated from the income statement, provide metrics to compare a company’s performance against industry benchmarks.

Integration with Other Financial Statements

While the income statement is powerful on its own, integrating its data with other financial statements like the balance sheet and cash flow statement can provide a more comprehensive view of a business’s financial health.

Synergizing Financial Data for Comprehensive Insight

  • Income Statement and Balance Sheet: Analyzing these together helps in understanding how the profitability is impacting the company’s assets and liabilities.
  • Income Statement and Cash Flow Statement: This integration shows how the profits are translating into actual cash flows, crucial for assessing the liquidity and operational efficiency of the business.

Mastering Your Income Statement for Business Success

Your income statement is much more than a mere financial record; it is a vital instrument in navigating your business’s future.

By thoroughly understanding and analyzing this key document, you unlock the potential to pinpoint growth opportunities, pinpoint areas for cost-saving, and devise strategies to enhance your financial wellbeing.

Regular review and comprehension of your income statement are crucial for informed decision-making, directly impacting budgeting, forecasting, and strategic planning.

An in-depth knowledge of the various components of your income statement – including each line item, its definition, and practical applications – is fundamental to successful business management.

This understanding forms the backbone of effective budget management and long-term business strategy, guiding you in aligning every financial decision with your overarching business objectives.

Using this guide of small business finance tips , business owners can get started on the path toward improved financial performance. Make sure to hire an accountant to help you accurately track and report your financials if you feel it can benefit your business.

What Are the Four Key Elements of an Income Statement?

key elements of an income statement

The income statement is comprised of four key elements, each contributing vital information to this comprehensive financial report:

  • Revenue: This is the total income a company earns from the sale of goods and services. It serves as the starting point of the income statement.
  • Expenses: These are the costs incurred in the production and delivery of the goods and services sold by the company. This could include costs for raw materials, labor, rent, utilities, and more.
  • Gains: These are increases in a company’s net assets from peripheral or incidental transactions, which are not related to the company’s primary operations. Examples could include profit from selling investments or property.
  • Losses: On the other hand, losses represent decreases in a company’s net assets from peripheral or incidental transactions. Examples could include losses from the sale of investments or property.

What is a common-size income statement?

A common-size income statement is a type of financial statement that displays all the items in an income statement as percentages of sales or total revenue.

Common-size statements are useful for comparing results between different years or across different companies, by providing an easy way to compare the size of each item to total revenue. The common-size statement shows easily how expenses, such as cost of goods sold, salaries, and other operating costs change relative to sales or total revenue.

Analysts can use this information to identify changes and trends over time and make strategic decisions based on their findings.

Are there different types of income statements?

Yes, there are different types of income statements. The most common type is the single-step income statement, which combines all expenses into one line item. A multiple-step income statement is more detailed and breaks out each type of expense into separate line items.

This type of income statement can be used to identify areas where cost-cutting can be done or to analyze trends over time. A common-size income statement also displays all the line items as percentages so that users can compare financial results between different years or companies more easily.

income statement for business plan

What is the income statement formula?

The income statement formula is used to calculate the net income or net loss of a business. It is calculated by subtracting total expenses from total revenues. Total revenues include all sources of income, while total expenses include both operating and non-operating costs.

Operating expenses are related directly to the operations of the business, such as the cost of goods sold, wages, and taxes. Non-operating expenses are unrelated to the operations of the business, such as interest expenses or gains and losses on investments.

The result is either a positive net income or a negative net loss which is then reported on the income statement.

What Is the Difference Between Operating Revenue and Non-Operating Revenue?

income statement and revenue

Operating revenue is income generated by the core activities of a business, such as sales of goods or services. Non-operating revenue is income not related to the day-to-day operations of the business and includes items such as interest income and gains on investments.

The difference between operating and non-operating revenue is important for both tax purposes and in understanding the total financial picture of a business. Operating revenues are subject to most taxes, while non-operating revenue may be excluded from taxable income in certain circumstances.

Knowing exactly what your business earns in each category can help you manage and optimize your financial performance.

What Insights Should You Look for in an Income Statement?

An income statement is a financial document that provides important insight into the overall health of a business. It lists both revenues and expenses in order to provide a comprehensive view of net income or loss.

When reviewing an income statement, you should look for key metrics such as total revenue and total expenses, as well as gross profit and operating margin. You can also gain insights into the company’s cost structure by looking at what percentages of total revenue have been spent on each expense category.

By understanding these key metrics, you can assess how profitable a business is and make informed decisions about its future operations. A net worth calculator can also provide valuable insights into the financial health of a business.

Image: Envato Elements

income statement for business plan

Nice article! Especially for seasonal businesses, I have found a rolling twelve-month income statement to be more helpful than a monthly income statement for comparing the current period to previous periods. For example, comparing the twelve months ended 3/31/23 to the twelve months ended 2/28/23 makes much more sense for a landscaper than comparing only March 2023 to only February 2023. Comparing only March to only February is difficult, as February is still a slow month for landscapers, while March is when business starts picking up. When you use the rolling twelve months, it removes seasonality, because each income statement period includes all twelve months.

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6 Small Business Financial Statements for Startup Financing

Financial Statements You'll Need for Your Startup Business Plan

You're ready to start your small business and your're working on a great business plan to take to a bank or other lender. A key part of that plan is the financial statements. These statements will be looked at carefully by the lender, so here are some tips for making these documents SELL your business plan . 

Financial Statements You Will Need

You may need several different types of statements, depending on the requirements of your lender and your own technical expertise. 

The statements you will certainly need are:

  • A startup budget or cash flow statement
  • A startup costs worksheet
  • A pro forma (projected) profit and loss statement
  • A pro forma (projected) balance sheet 

Your lender may also want these financial statements: 

  • Sources and uses of funds statement
  • Break-even analysis

Putting these Statements in Order

First, work on your startup budget and your startup costs worksheet. You'll need to do a lot of estimating.

The trick is to underestimate income and overestimate expenses, so you can create a more realistic picture of your business over the first year or two.

Then work on a profit and loss statement for the first year. A lender will definitely want to see this one. And, even though it's not going to be accurate, lenders like to see a startup balance sheet. 

Some lenders may ask for a break-even analysis, a cash flow statement, or a sources and uses of funds statement. We'll go over these statements so you can quickly provide them if asked.

Business Startup Budget

 A startup budget is like a projected cash flow statement, but with a little more guesswork.

Your lender wants to know your budget - that is, what you expect to bring in and how much to expect to spend each month. Lenders want to know that you can follow a budget and that you will not over-spend. 

They also want to see how much you will need to pay your bills while your business is starting out (working capital), and how long it will take you to have a positive cash flow (bring in more money than you are spending). 

Include some key information on your budget:

  • What products or services you are selling, including prices and estimated volumes
  • Key drivers for expenses, like how many employees you'll need and your marketing initiatives  

A typical budget worksheet should be carried through three years, so your lender can see how you expect to generate the cash to make your monthly loan payments.

Startup Costs Worksheet

A startup costs worksheet answers the question "What do you need the money for?" In other words, it shows all the purchases you will need to make in order to open your doors for business. This could be called a "Day One" statement  because it's everything you will need on your first day of business. 

  • Facilities costs, like deposits on insurance and utilities
  • Office equipment, computers, phones
  • Supplies and advertising materials like signs and business cards
  • Fees to set up your business website and email
  • Legal fees licenses and permits

Profit and Loss Statement/Income Statement

After you have completed the monthly budget and you have gathered some other information, you should be able to complete a Profit and Loss  or Income Statement. This statement shows your business activity over a specific period of time, like a month, quarter, or year.

To create this statement, you'll need to list all your sources to get your gross income over that time. Then, list all expenses for the same time.

Because you haven't started yet, this statement is a called a projected P&L, because it projects out your estimates into the future.  

This statement gathers up all your sources of income, including shows your profit or loss for the year and how much tax you estimate having to pay.

Break-Even Analysis

A break-even analysis shows your lender that you know the point at which you will start making a profit or the price that will cover your fixed costs . The break-even analysis is primarily for businesses making or selling products, or to set the right price for a product or service.  

It's usually shown as a graph with sales volume on the X axis and revenue on the Y axis. Then fixed an variable costs (those you must pay) are included. The break-even point marks the place where costs are covered.

This analysis can also be useful for service-type businesses to show an overall profit point for specific services. If you include a break-even analysis, be sure you can explain it.

Beginning Balance Sheet

A startup balance sheet is difficult to prepare, even if there isn't much to include. The balance sheet shows the value of the assets you have purchased for startup, how much you owe to lenders and other creditors, and any initial investments you have made to get started. The date for this spreadsheet is the day you open the business.

Sources and Uses of Funds Statement

Large businesses use Sources and Uses of Funds statements in their annual reports, but you can create a slightly different simple statement to show your lender what you need the money for, what sources you have already, and what's left over to be financed.

To create this statement, list all your startup and working capital(on-going cash needs), how much collateral you will be bringing to the business, other sources of funding, and how much you need to borrow. 

Optional: A Business Requirements Document

 A business requirements document is similar to a proposal document, but for a larger, more complex project or startup. It gives a complete picture of the project or the business plan. It goes into more detail on the project that will be using the financial statements. 

Include Financial Statements in Your Business Plan

You will need a complete startup business plan to take to a bank or other business lender. The financial statements are a key part of this plan. Give the main points in the executive summary and include all the statements in the financial section. 

Finally, Check for Mistakes!

Before you submit your startup business plan and financial statements, check this list. Don't make these  common business plan mistakes !

Check all numbers for accuracy and consistency. Especially make sure the amounts you are requesting are specific and that they are the same throughout all the parts of your business plan.

SCORE.org. " How to Set Up and Maintain a Budget for Your Small Business ." Accessed Sept. 10, 2020.

SCORE.org. " Financial Projections Template ." Accessed Sept. 10, 2020.

Harvard Business Review. " A Quick Guide to Breakeven Analysis ." Accessed Sept. 10, 2020.

Pioneer's Perspective

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How to Write an Income Statement for Your Business Plan

News Room

Financial data is always at the back of the business plan, but that doesn’t mean it’s any less important than up-front material such as the description of the business concept and the management team. Astute investors look carefully at the charts, tables, formulas, and spreadsheets in the financial section because they know that this information is like the pulse, respiration rate, and blood pressure in a human being. It shows the condition of the patient. In fact, you’ll find many potential investors taking a quick peek at the numbers before reading the plan.

Financial statements come in threes: income statement, balance sheet, and cash flow statement. Taken together they provide an accurate picture of a company’s current value, plus its ability to pay its bills today and earn a profit going forward. This information is very important to business plan readers.

Why You Need an Income Statement

In his article, How to Do a Monthly Income Statement Analysis That Fuels Growth, Noah Parsons writes: “In short, you use your income statement to fuel a greater analysis of the financial standing of your business. It helps you identify any top-level issues or opportunities that you can then dive into with forecast scenarios and by looking at elements of your other financial documentation.

You want to leverage your income statement to understand if you’re performing better, worse or as expected. This is done by comparing it to your sales and expense forecasts through a review process known as plan vs actuals comparison. You then update projections to match actual performance to better showcase how your business will net out moving forward.”

What Is In an Income Statement

An income statement shows whether you are making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line.

Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives. They can get pretty complicated in their attempt to capture sources of income, such as interest, and expenses, such as depreciation. But the basic idea is pretty simple: If you subtract costs from income, what you have left is profit.

To figure out your income statement, you need to gather a bunch of numbers, most of which are easily obtainable. They include your gross revenue, which is made up of sales and any income from interest or sales of assets; your sales, general, and administrative (SG&A) expenses; what you paid out in interest and dividends, if anything; and your corporate tax rate. If you have those, you’re ready to go.

Sales and Revenue

Revenue is all the income you receive from selling your products or services as well as from other sources such as interest income and sales of assets.

Gross Sales

Your sales figure is the income you receive from selling your product or service. Gross sales equals total sales minus returns. It doesn’t include interest or income from sales of assets.

Interest and Dividends

Most businesses have a little reserve fund they keep in an interest-bearing bank or money market account. Income from this fund, as well as from any other interest-paying or dividend-paying securities they own, shows up on the income statement just below the sales figure.

Other Income

If you finally decide that the branch office out on County Line Road isn’t ever going to turn a decent profit, and you sell the land, building, and fixtures, the income from that sale will show up on your income statement as “other income.” Other income may include sales of unused or obsolete equipment or any income-generating activity that’s not part of your main line of business.

Costs come in all varieties—that’s no secret. You’ll record variable costs, such as the cost of goods sold, as well as fixed costs—rent, insurance, maintenance, and so forth. You’ll also record costs that are a little trickier, the prime example being depreciation.

Cost of Goods Sold

Cost of goods sold, or COGS, includes expenses associated directly with generating the product or service you’re selling. If you buy smartphone components and assemble them, your COGS will include the price of the chips, screen, and other parts, as well as the wages of those doing the assembly. You’ll also include supervisor salaries and utilities for your factory. If you’re a solo professional service provider, on the other hand, your COGS may amount to little more than whatever salary you pay yourself and whatever technology you may use for your business.

Sales, General, and Administrative Costs

You have some expenses that aren’t closely tied to sales volume, including salaries for office personnel, salespeople compensation, rent, insurance, and the like. These are split out from the sales-sensitive COGS figure and included on a separate line.

Depreciation

Depreciation is one of the most baffling pieces of accounting wizardwork. It’s a paper loss, a way of subtracting over time the cost of a piece of equipment or a building that lasts many years even though it may get paid for immediately.

Depreciation isn’t an expense that involves cash coming out of your pocket. Yet it’s a real expense in an accounting sense, and most income statements will have an entry for depreciation coming off the top of pretax earnings. It refers to an ongoing decrease in asset value.

If you have capital items that you are depreciating, such as an office in your home or a large piece of machinery, your accountant will be able to set up a schedule for depreciation. Each year, you’ll take a portion of the purchase price of that item off your earnings statement. Although it hurts profits, depreciation can reduce future taxes.

Paying the interest on loans is another expense that gets a line all to itself and comes out of earnings just before taxes are subtracted. This line doesn’t include payments against the principal. Because these payments result in a reduction of liabilities—which we’ll talk about in a few pages in connection with your balance sheet—they’re not regarded as expenses on the income statement.

The best thing about taxes is that they’re figured last, on the profits that are left after every other thing has been taken out. Tax rates vary widely according to where your company is located, how and whether state and local taxes are figured, and your special tax situation. Use previous years as a guidepost for future returns. If you are just opening your business, work carefully with your accountant to set up a system whereby you can pay the necessary taxes at regular intervals.

Buzzword: EBIT

EBIT stands for earnings before interest and taxes. It is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest.

Important Plan Note

Don’t confuse sales with receipts. Your sales figure represents sales booked during the period, not necessarily money received. If your customers buy now and pay later, there may be a significant difference between sales and cash receipts.

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Financial Templates for Your Business Plan

Income statement, balance sheet, cash flow, and more, use the financial statements template to prepare what you need for your business plan..

The financial statements template for each of the major financials will help you create exactly what you need for your business plan.  The links in the left column will help you find exactly which financial statements template you need.

The financial projections of your business plan are very important to investors, lenders, and to you too of course! Yet, many new business owners struggle to understand how to create a pro-forma or projected income statement, statement of cash flow and balance sheet. That’s okay! In this section, you’ll learn what each of these financial statements is about, how they are different, and what they include. If you have some background in accounting or finance, the sections below will give you great guidance on what to include in your business plan and how to present it.

Included in this Section

  • Income Statement
  • Balance Sheet
  • Sources and Uses of Funds

If you are a future business owner without any accounting background, you’ll learn the basics of each type of financial statement so that when you reach for outside help, you won’t be in the dark. Better still, by reading the information below, you’ll gain the confidence to discuss your financial statements with a lender, banker or investor. When making a loan or investment, bankers will want to know that you understand the basics of financial statements. The information, guidelines, examples and templates in the sections below will make sure that you do.

Click any section title in the left column for a detailed description and complete overview of what should be included, mistakes to avoid, and important considerations.

Your business plan needs to include a pro-forma balance sheet, income statement, and cash flow statement. The term “pro-forma” means projected or forecast. Most future business owners who do not have experience with financial statements seek outside help to complete this part of their plan. Whether you plan to prepare your own financials or get outside help, this section is intended to make sure that you know what to include and that you will be well prepared to discuss your financial statements with a banker or investor.

When working on  how to prepare a balance sheet , income statement and statement of cash flow, plan to prepare quarterly projections for year 1, and yearly projections for years 2-3.  Some investors or bankers will expect 5 year projections but that is not as common for startup businesses.  If you’re new to financial statements, here is a brief definition of each type:

Income Statement: Also known as a profit and loss statement. Shows the company’s revenue, expenses, and profit or loss. Key formula: Total Revenue – Total Expenses = Profit or Loss.  This is an important financial statement that you should learn to work with very carefully–it tells you how your business is doing each month. Our financial statements template for profit and loss will help you learn the key concepts.

Balance Sheet:  This financial statement template will help you show the value of the company’s assets, liabilities and owner’s equity. Key equation: Assets = Liabilities + Owner’s Equity. Additionally, when creating your sample balance sheet , understand that this is the only financial statement that applies to a single point in time. It is a “snapshot” at a given point in time, unlike the other financial statements that show activity throughout a period of time. A small business balance sheet should include assets such as: cash, accounts receivable, and inventory.

Statement of Cash Flow:  The statement of cash flow financial statement template maps inflows and outflows of cash. Sales and profit alone don’t tell the whole story. It’s important to know when money will come in and when money will be going out.

There are several key questions to be answered by this section of the plan. Lenders will want to know if the business will be able to repay the loan they are seeking. Investors will want to see if the longer-term growth trends represent a good investment for them. Both lenders and investors will want to see that the business is sufficiently capitalized so that it doesn’t run out of money, and how fast the business can reach break-even and become profitable.

Business Plan Outline for Financials:

  • 3-Year Pro-Forma Income Statement
  • Balance Sheet at the end of Years 1, 2 and 3
  • 3-Year Pro-Forma Statement of Cash Flow
  • Capitalization (Sources and Uses of Funds)

Important Considerations

Historical financial statements are different from those presented in a business plan. Historical financial statements report on a business’s actual financial performance and are used, in part, to prepare income taxes. They must take into account tax laws regarding depreciation, revenue recognition and other matters. While the financial statements for a business plan must be thorough, they are used for different purposes and require a different level of detail.

There are two overarching considerations for your pro-forma financial statements: First, they must match what you say in your business plan. Everything referenced in the text of the business plan must be included in the financial statements. For example, if the business plan says that there will be 15 people on the payroll at the end of the first year, the payroll section of the income statement must show the payroll expense for 15 people at month 12. If your marketing section says there will be an advertising blitz just prior to the holidays, then the marketing expense line of your income statement must reflect that. Everything must match up.

The second overarching consideration for your financial projections is, “How reasonable are your expectations?” Since nobody knows if your forecasts are accurate, you will need to emphasize how reasonable they are. Here are three examples of trouble signs from financial statements from business plans we have reviewed (critiques are shown in italics):

  • A company was applying for a business loan from a bank. The income statement forecasted that the business would still be losing money in three years. It was not reasonable to expect a bank to lend money to this business when the financial statements projected they would not be able to repay the loan.
  • A start-up was forecasting that their revenue would go from $0 to over $1 billion in 3 years, with an investment of just $250,000. This revenue forecast was not realistic. Not even Google grew that fast in its first three years.
  • A business plan showed profit margins of 50% when the industry average for their type of business was 15%. The profit margins are not reasonable. An experienced lender or investor would recognize that this person either did not have a good handle on operations costs or pricing, or both.

For more information or the specific financial statements template you need, see the specific sections on the Balance Sheet ,  Income Statement  or  Cash Flow Statement .   Or, for a different perspective, see the Wikipedia page on the financial statements template which you can find here .

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How to Prepare a Financial Plan for Startup Business (w/ example)

Financial Statements Template

Free Financial Statements Template

Ajay Jagtap

  • December 7, 2023

13 Min Read

financial plan for startup business

If someone were to ask you about your business financials, could you give them a detailed answer?

Let’s say they ask—how do you allocate your operating expenses? What is your cash flow situation like? What is your exit strategy? And a series of similar other questions.

Instead of mumbling what to answer or shooting in the dark, as a founder, you must prepare yourself to answer this line of questioning—and creating a financial plan for your startup is the best way to do it.

A business plan’s financial plan section is no easy task—we get that.

But, you know what—this in-depth guide and financial plan example can make forecasting as simple as counting on your fingertips.

Ready to get started? Let’s begin by discussing startup financial planning.

What is Startup Financial Planning?

Startup financial planning, in simple terms, is a process of planning the financial aspects of a new business. It’s an integral part of a business plan and comprises its three major components: balance sheet, income statement, and cash-flow statement.

Apart from these statements, your financial section may also include revenue and sales forecasts, assets & liabilities, break-even analysis , and more. Your first financial plan may not be very detailed, but you can tweak and update it as your company grows.

Key Takeaways

  • Realistic assumptions, thorough research, and a clear understanding of the market are the key to reliable financial projections.
  • Cash flow projection, balance sheet, and income statement are three major components of a financial plan.
  • Preparing a financial plan is easier and faster when you use a financial planning tool.
  • Exploring “what-if” scenarios is an ideal method to understand the potential risks and opportunities involved in the business operations.

Why is Financial Planning Important to Your Startup?

Poor financial planning is one of the biggest reasons why most startups fail. In fact, a recent CNBC study reported that running out of cash was the reason behind 44% of startup failures in 2022.

A well-prepared financial plan provides a clear financial direction for your business, helps you set realistic financial objectives, create accurate forecasts, and shows your business is committed to its financial objectives.

It’s a key element of your business plan for winning potential investors. In fact, YC considered recent financial statements and projections to be critical elements of their Series A due diligence checklist .

Your financial plan demonstrates how your business manages expenses and generates revenue and helps them understand where your business stands today and in 5 years.

Makes sense why financial planning is important to your startup, doesn’t it? Let’s cut to the chase and discuss the key components of a startup’s financial plan.

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income statement for business plan

Key Components of a Startup Financial Plan

Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup’s financial planning process.

Income Statement

An Income statement , also known as a profit-and-loss statement(P&L), shows your company’s income and expenditures. It also demonstrates how your business experienced any profit or loss over a given time.

Consider it as a snapshot of your business that shows the feasibility of your business idea. An income statement can be generated considering three scenarios: worst, expected, and best.

Your income or P&L statement must list the following:

  • Cost of goods or cost of sale
  • Gross margin
  • Operating expenses
  • Revenue streams
  • EBITDA (Earnings before interest, tax, depreciation , & amortization )

Established businesses can prepare annual income statements, whereas new businesses and startups should consider preparing monthly statements.

Cash flow Statement

A cash flow statement is one of the most critical financial statements for startups that summarize your business’s cash in-and-out flows over a given time.

This section provides details on the cash position of your business and its ability to meet monetary commitments on a timely basis.

Your cash flow projection consists of the following three components:

✅ Cash revenue projection: Here, you must enter each month’s estimated or expected sales figures.

✅ Cash disbursements: List expenditures that you expect to pay in cash for each month over one year.

✅ Cash flow reconciliation: Cash flow reconciliation is a process used to ensure the accuracy of cash flow projections. The adjusted amount is the cash flow balance carried over to the next month.

Furthermore, a company’s cash flow projections can be crucial while assessing liquidity, its ability to generate positive cash flows and pay off debts, and invest in growth initiatives.

Balance Sheet

Your balance sheet is a financial statement that reports your company’s assets, liabilities, and shareholder equity at a given time.

Consider it as a snapshot of what your business owns and owes, as well as the amount invested by the shareholders.

This statement consists of three parts: assets , liabilities, and the balance calculated by the difference between the first two. The final numbers on this sheet reflect the business owner’s equity or value.

Balance sheets follow the following accounting equation with assets on one side and liabilities plus Owner’s equity on the other:

Here is what’s the core purpose of having a balance-sheet:

  • Indicates the capital need of the business
  • It helps to identify the allocation of resources
  • It calculates the requirement of seed money you put up, and
  • How much finance is required?

Since it helps investors understand the condition of your business on a given date, it’s a financial statement you can’t miss out on.

Break-even Analysis

Break-even analysis is a startup or small business accounting practice used to determine when a company, product, or service will become profitable.

For instance, a break-even analysis could help you understand how many candles you need to sell to cover your warehousing and manufacturing costs and start making profits.

Remember, anything you sell beyond the break-even point will result in profit.

You must be aware of your fixed and variable costs to accurately determine your startup’s break-even point.

  • Fixed costs: fixed expenses that stay the same no matter what.
  • Variable costs: expenses that fluctuate over time depending on production or sales.

A break-even point helps you smartly price your goods or services, cover fixed costs, catch missing expenses, and set sales targets while helping investors gain confidence in your business. No brainer—why it’s a key component of your startup’s financial plan.

Having covered all the key elements of a financial plan, let’s discuss how you can create a financial plan for your startup.

How to Create a Financial Section of a Startup Business Plan?

1. determine your financial needs.

You can’t start financial planning without understanding your financial requirements, can you? Get your notepad or simply open a notion doc; it’s time for some critical thinking.

Start by assessing your current situation by—calculating your income, expenses , assets, and liabilities, what the startup costs are, how much you have against them, and how much financing you need.

Assessing your current financial situation and health will help determine how much capital you need for your startup and help plan fundraising activities and outreach.

Furthermore, determining financial needs helps prioritize operational activities and expenses, effectively allocate resources, and increase the viability and sustainability of a business in the long run.

Having learned to determine financial needs, let’s head straight to setting financial goals.

2. Define Your Financial Goals

Setting realistic financial goals is fundamental in preparing an effective financial plan. So, it would help to outline your long-term strategies and goals at the beginning of your financial planning process.

Let’s understand it this way—if you are a SaaS startup pursuing VC financing rounds, you may ask investors about what matters to them the most and prepare your financial plan accordingly.

However, a coffee shop owner seeking a business loan may need to create a plan that appeals to banks, not investors. At the same time, an internal financial plan designed to offer financial direction and resource allocation may not be the same as previous examples, seeing its different use case.

Feeling overwhelmed? Just define your financial goals—you’ll be fine.

You can start by identifying your business KPIs (key performance indicators); it would be an ideal starting point.

3. Choose the Right Financial Planning Tool

Let’s face it—preparing a financial plan using Excel is no joke. One would only use this method if they had all the time in the world.

Having the right financial planning software will simplify and speed up the process and guide you through creating accurate financial forecasts.

Many financial planning software and tools claim to be the ideal solution, but it’s you who will identify and choose a tool that is best for your financial planning needs.

income statement for business plan

Create a Financial Plan with Upmetrics in no time

Enter your Financial Assumptions, and we’ll calculate your monthly/quarterly and yearly financial projections.

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4. Make Assumptions Before Projecting Financials

Once you have a financial planning tool, you can move forward to the next step— making financial assumptions for your plan based on your company’s current performance and past financial records.

You’re just making predictions about your company’s financial future, so there’s no need to overthink or complicate the process.

You can gather your business’ historical financial data, market trends, and other relevant documents to help create a base for accurate financial projections.

After you have developed rough assumptions and a good understanding of your business finances, you can move forward to the next step—projecting financials.

5. Prepare Realistic Financial Projections

It’s a no-brainer—financial forecasting is the most critical yet challenging aspect of financial planning. However, it’s effortless if you’re using a financial planning software.

Upmetrics’ forecasting feature can help you project financials for up to 7 years. However, new startups usually consider planning for the next five years. Although it can be contradictory considering your financial goals and investor specifications.

Following are the two key aspects of your financial projections:

Revenue Projections

In simple terms, revenue projections help investors determine how much revenue your business plans to generate in years to come.

It generally involves conducting market research, determining pricing strategy , and cash flow analysis—which we’ve already discussed in the previous steps.

The following are the key components of an accurate revenue projection report:

  • Market analysis
  • Sales forecast
  • Pricing strategy
  • Growth assumptions
  • Seasonal variations

This is a critical section for pre-revenue startups, so ensure your projections accurately align with your startup’s financial model and revenue goals.

Expense Projections

Both revenue and expense projections are correlated to each other. As revenue forecasts projected revenue assumptions, expense projections will estimate expenses associated with operating your business.

Accurately estimating your expenses will help in effective cash flow analysis and proper resource allocation.

These are the most common costs to consider while projecting expenses:

  • Fixed costs
  • Variable costs
  • Employee costs or payroll expenses
  • Operational expenses
  • Marketing and advertising expenses
  • Emergency fund

Remember, realistic assumptions, thorough research, and a clear understanding of your market are the key to reliable financial projections.

6. Consider “What if” Scenarios

After you project your financials, it’s time to test your assumptions with what-if analysis, also known as sensitivity analysis.

Using what-if analysis with different scenarios while projecting your financials will increase transparency and help investors better understand your startup’s future with its best, expected, and worst-case scenarios.

Exploring “what-if” scenarios is the best way to better understand the potential risks and opportunities involved in business operations. This proactive exercise will help you make strategic decisions and necessary adjustments to your financial plan.

7. Build a Visual Report

If you’ve closely followed the steps leading to this, you know how to research for financial projections, create a financial plan, and test assumptions using “what-if” scenarios.

Now, we’ll prepare visual reports to present your numbers in a visually appealing and easily digestible format.

Don’t worry—it’s no extra effort. You’ve already made a visual report while creating your financial plan and forecasting financials.

Check the dashboard to see the visual presentation of your projections and reports, and use the necessary financial data, diagrams, and graphs in the final draft of your financial plan.

Here’s what Upmetrics’ dashboard looks like:

Upmetrics financial projections visual report

8. Monitor and Adjust Your Financial Plan

Even though it’s not a primary step in creating a good financial plan, it’s quite essential to regularly monitor and adjust your financial plan to ensure the assumptions you made are still relevant, and you are heading in the right direction.

There are multiple ways to monitor your financial plan.

For instance, you can compare your assumptions with actual results to ensure accurate projections based on metrics like new customers acquired and acquisition costs, net profit, and gross margin.

Consider making necessary adjustments if your assumptions are not resonating with actual numbers.

Also, keep an eye on whether the changes you’ve identified are having the desired effect by monitoring their implementation.

And that was the last step in our financial planning guide. However, it’s not the end. Have a look at this financial plan example.

Startup Financial Plan Example

Having learned about financial planning, let’s quickly discuss a coffee shop startup financial plan example prepared using Upmetrics.

Important Assumptions

  • The sales forecast is conservative and assumes a 5% increase in Year 2 and a 10% in Year 3.
  • The analysis accounts for economic seasonality – wherein some months revenues peak (such as holidays ) and wanes in slower months.
  • The analysis assumes the owner will not withdraw any salary till the 3rd year; at any time it is assumed that the owner’s withdrawal is available at his discretion.
  • Sales are cash basis – nonaccrual accounting
  • Moderate ramp- up in staff over the 5 years forecast
  • Barista salary in the forecast is $36,000 in 2023.
  • In general, most cafes have an 85% gross profit margin
  • In general, most cafes have a 3% net profit margin

Projected Balance Sheet

Projected Balance Sheet

Projected Cash-Flow Statement

Cash-Flow Statement

Projected Profit & Loss Statement

Profit & Loss Statement

Break Even Analysis

Break Even Analysis

Start Preparing Your Financial Plan

We covered everything about financial planning in this guide, didn’t we? Although it doesn’t fulfill our objective to the fullest—we want you to finish your financial plan.

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Frequently Asked Questions

How often should i update my financial projections.

Well, there is no particular rule about it. However, reviewing and updating your financial plan once a year is considered an ideal practice as it ensures that the financial aspirations you started and the projections you made are still relevant.

How do I estimate startup costs accurately?

You can estimate your startup costs by identifying and factoring various one-time, recurring, and hidden expenses. However, using a financial forecasting tool like Upmetrics will ensure accurate costs while speeding up the process.

What financial ratios should startups pay attention to?

Here’s a list of financial ratios every startup owner should keep an eye on:

  • Net profit margin
  • Current ratio
  • Quick ratio
  • Working capital
  • Return on equity
  • Debt-to-equity ratio
  • Return on assets
  • Debt-to-asset ratio

What are the 3 different scenarios in scenario analysis?

As discussed earlier, Scenario analysis is the process of ascertaining and analyzing possible events that can occur in the future. Startups or businesses often consider analyzing these three scenarios:

  • base-case (expected) scenario
  • Worst-case scenario
  • best case scenario.

About the Author

income statement for business plan

Ajay is a SaaS writer and personal finance blogger who has been active in the space for over three years, writing about startups, business planning, budgeting, credit cards, and other topics related to personal finance. If not writing, he’s probably having a power nap. Read more

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Pro Forma Business Plan Template & Financial Statements

Written by Dave Lavinsky

Pro Forma Financial Statement Template

What are Pro Forma Financial statements?

A pro forma business plan is simply another name for a business plan. The term “pro forma” specifically means “based on financial assumptions or projections” which all business plans are. That is, all business plans present a vision of the company’s future using assumptions and projections. “Pro forma” most specifically refers to the financial projections included in your plan, as these are entirely based on future assumptions.

Pro forma financial statements are a type of statement that provides estimates or financial projections for a company. They are often used by businesses to plan for upcoming periods or quarters, assess new opportunities, or track progress against goals.

Why include a Pro Forma Statement in your Business Plan

A pro forma statement is important for your business plan because it gives investors and lenders an idea of your company’s potential financial health. They use your pro forma statements in determining whether to invest in your company or not. Among other things, they consider the likelihood your company will achieve the financial results you forecast, and their expected return on investment (ROI). Your pro forma financial statements also help you to identify and track key financial indicators and metrics over time.

Writing a Pro Forma Business Plan

When writing a pro forma business plan, you will need to include information such as your company’s sales forecasts, expenses, capital expenditure plans, and funding requirements. You should also include a pro forma income statement, balance sheet, and cash flow statement.

Importance of a Pro Forma Income Statement in Business Plans

The pro forma income statement is a crucial financial tool that can be used to assess the viability of your business. It shows a company’s expected revenue and expenses over a period of time and can help you to identify potential problems early on.

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Types of pro forma statements in business plans.

There are several types of pro forma statements, including the income statement, balance sheet, and cash flow statement.

Pro Forma Income Statement

A pro forma income statement is an estimate of your company’s financial performance over a period of time. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Example 5 Year Annual Income Statement

Pro Forma Balance Sheet

A pro forma balance sheet is an estimate of your company’s financial position at a specific point in time. It shows your assets, liabilities, and equity, and can be used to assess your company’s financial health.

Example 5 Year Annual Balance Sheet

Pro Forma Cash Flow Statement

A pro forma cash flow statement is an estimate of how your company’s cash flows over a period of time. It shows your expected cash inflows and outflows and can be used to assess your company’s financial health and ensure you never run out of money.

Example 5 Year Annual Cash Flow Statement

Pro Forma Income Statements for a Business Plan

Pro forma statements for a business plan can take many different forms, but they all typically include information on sales forecasts, expenses, capital expenditure plans, and funding requirements. A pro forma statement that is included in a business plan template should also include financial projections and break-even analysis. 

Cash Flow Statements and Pro Forma Income Statements

The main difference between a cash flow statement and a pro forma income statement is that a cash flow statement shows your actual cash inflows and outflows, while a pro forma income statement shows your estimated future financial performance. For example, if you make a sale today, it will be considered revenue in your income statement. But, if you don’t receive payment for that sale for 90 days, that would be reflected in your cash flow statement. A cash flow statement can help you to manage your finances effectively, while a pro forma income statement can help you to assess the viability of your business.

Pro Forma Statements and Budgets

Pro forma statements and budgets are both financial tools that can be used to track the progress of a business. However, there are key differences between them.

A budget is a plan for how you will use your resources to achieve specific goals. It shows your expected income and expenses and can help you to stay on track financially.

A pro forma statement estimates your company’s future financial performance. It shows your expected revenue and expenses and can be used to assess the viability of your business.

Both pro forma statements and budgets can be useful tools for businesses. However, budgets are more focused on short-term planning , while pro forma statements are more concerned with long-term financial planning.

Business Plan Pro Forma Template and Example

The following is an example of a pro forma business plan:

Executive Summary

In this pro forma business plan, we forecasted our company’s sales, expenses, and capital expenditures over the next three years. We also estimated our funding requirements and outlined our plans for growth. Our pro forma income statement shows that we are expected to have positive net income each year of the forecast period. Our pro forma balance sheet shows that we will have a strong financial position, with increasing equity and minimal debt. Lastly, our pro forma statement predicts healthy cash flow throughout the three-year period. We believe that these results demonstrate the viability of our business and its potential for long-term success.

Our company is XYZ, a leading provider of ABC products and services. We have been in business for 10 years, and our products are sold in over 10 countries. We have a strong track record of financial success, and we are now looking to expand our operations into new markets. In order to do this, we need to raise $5 million in funding.

Business Plan Pro Forma

In this section of the business plan, we will provide pro forma statements for our company’s sales, expenses, capital expenditures, funding requirements, and cash flow. These statements will demonstrate the viability of our business and its potential for long-term success.

Sales Forecast

We forecast that our sales will increase by 20% in each year of the forecast period. This growth will be driven by our expansion into new markets, as well as our continued focus on innovation and customer service.

Expense Forecast

We expect our expenses to increase at a slower rate than our sales, due to our economies of scale. We anticipate that our expenses will increase by 15% in Year 1, 10% in Year 2, and 5% in Year 3.

Capital Expenditure Forecast

We forecast that our capital expenditures will increase in line with our sales, at a rate of 20% per year. We plan to invest heavily in research and development, as well as new product launches.

Funding Requirements

We estimate that we will need to raise $5 million in funding in order to expand our operations into new markets. We plan to use this funding to invest in research and development, as well as to cover the costs of marketing and new product launches.

Cash Flow Forecast

Our pro forma cash flow statement predicts healthy cash flow throughout the three-year period. We expect to have positive cash flow in each year of the forecast period.

This pro forma business plan demonstrates the viability of our company and its potential for long-term success. We have a strong track record of financial success, and we are well-positioned to continue growing our business. Our pro forma statements show that we are expected to generate positive net income, and have a strong financial position and healthy cash flow. We believe that this business plan provides a clear roadmap for our company’s future growth.

A pro forma business plan is an important tool for any business owner. By outlining your sales, expenses, and profit, you can get a clear picture of your company’s financial health and make informed decisions about its future. If you’re not sure where to start, we can help. Our team of experts has created a comprehensive business plan template that will guide you through the process of creating your own pro forma business plan. So what are you waiting for? Get started today and ensure your company’s success tomorrow.

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4 Key Financial Statements For Your Startup Business Plan

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  • September 12, 2022
  • Fundraising

financial statements startup business plan

If you’re preparing a business plan for your startup, chances are that investors (or a bank) have also asked you to produce financial projections for your business. That’s absolutely normal: any startup business plan should at least include forecasts of the 3 financial statements.

The financial projections need to be presented clearly with charts and tables so potential investors understand where you are going, and how much money you need to get there .

In this article we explain you what are the 4 financial statements you should include in the business plan for your startup. Let’s dive in!

Financial Statement #1: Profit & Loss

The profit and loss (P&L) , also referred to as “income statement”, is a summary of all your revenues and expenses over a given time period .

By subtracting expenses from revenues, it gives a clear picture of whether your business is profitable, or loss-making. With the balance sheet and the cash flow statement, it is one of the 3 consolidated financial statements every startup must produce every fiscal year .

Most small businesses produce a P&L on a yearly basis with the help of their accountant. Yet it is good practice to keep track of all revenues and expenses on a monthly or quarterly basis as part of your budget instead.

When projecting your financials as part of your business plan, you must do so on a monthly basis. Usually, most startups project 3 years hence 36 months. If you have some historical performance (for instance you started your business 2 years ago), project 5 years instead.

income statement for business plan

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Financial Statement #2: Cash Flow

Whilst your P&L includes all your business’ revenues and expenses in a given period, the cash flow statement records all cash inflows and outflows over that same period.

Some expenses are not necessarily recorded in your P&L but should be included in your cash flow statement instead. Why is that? There are 2 main reasons:

  • Your P&L shows a picture of all the revenues you generated over a given period as well as the expenses you incurred to generate these revenues . If you sell $100 worth of products in July 2021 and incurred $50 cost to source them from your supplier, your P&L shows $100 revenues minus $50 expenses for that month. But what about if you bought a $15,000 car to deliver these products to your customers? The $15,000 should not be recorded as an expense in your P&L, but a cash outflow instead. Indeed, the car will help you generate revenues, say over the next 5 years, not just in July 2021
  • Some expenses in your P&L are not necessarily cash outflows. Think depreciation and amortization expenses for instance: they are pure artificial expenses and aren’t really “spent”. As such, whilst your P&L might include a $100 depreciation expense, your cash flow remains the same.

income statement for business plan

Financial Statement #3: Balance Sheet

Whilst the P&L and cash flow statement are a summary of your financial performance over a given time period, the balance sheet is a picture of your financials at a given time.

The balance sheet lists all your business’ assets and liabilities at a given time (at end of year for instance). As such, it includes things such as:

  • Assets: patents, buildings, equipments, customer receivables, tax credits etc. Assets can be either tangible (e.g. buildings) or intangible (e.g. customer receivables ).
  • Liabilities: debt, suppliers payables, etc.
  • Equity : the paid-in capital invested to date in the company (from you and any other potential investors). Equity also includes the cumulative result of your P&L: the sum of your profits and losses to date

Whilst P&L and cash flow statement are fairly simple to build when preparing your business plan, you might need help for your balance sheet.

income statement for business plan

Financial Statement #4: Use of Funds

The use of funds is not a mandatory financial statement your accountant will need to prepare every year. Instead, you shall include it in your startup business plan, along with the 3 key financial statements.

Indeed, the use of funds tells investors where you will spend your money over a given time frame. For instance, if you are raising $500k to open a retail shop, you might need $250k for the first year lease and another $250k for the inventory.

Use of funds should not be an invention from you: instead it is the direct result of your cash flow statement . If you are raising for your first year of business, and your projected cash flow statement result in a $500k loss (including all revenues and expenses), you will need to raise $500k.

For instance, using the example above, if you need $500k over the next 12 months, raise $600k or so instead. Indeed, better be on the safe side in case things do not go as expected!

income statement for business plan

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What Is an Income Statement?

  • Understanding the Statement

Revenue and Gains

Expenses and losses, income statement structure.

  • Reading Standard Statements

Uses of Income Statements

What are the four key elements of an income statement, what is the difference between operating revenue and non-operating revenue, what insights should you look for in an income statement, the bottom line.

  • Corporate Finance
  • Financial statements: Balance, income, cash flow, and equity

Income Statement: How to Read and Use It

What you need to know about this essential financial statement

James Chen, CMT is an expert trader, investment adviser, and global market strategist.

income statement for business plan

Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

An income statement is one of the three important financial statements used for reporting a company’s  financial performance  over a specific accounting period. The other two key statements are the balance sheet  and the cash flow statement .

The income statement focuses on the revenue, expenses, gains, and losses reported by a company during a particular period. Also known as the profit and loss (P&L) statement or the statement of revenue and expense, an income statement provides valuable insights into a company’s operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.

Key Takeaways

  • An income statement is one of the three major financial statements, along with the balance sheet and the cash flow statement, that report a company’s financial performance over a specific accounting period.
  • The income statement focuses on the revenue, expenses, gains, and losses of a company during a particular period.
  • An income statement provides valuable insights into a company’s operations, the efficiency of its management, underperforming sectors, and its performance relative to industry peers.

Mira Norian / Investopedia

Understanding the Income Statement

The income statement is an integral part of the company performance reports that must be submitted to the U.S. Securities and Exchange Commission (SEC). While a balance sheet provides the snapshot of a company’s financials as of a particular date, the income statement reports income through a specific period, usually a quarter or a year, and its heading indicates the duration, which may read as “For the (fiscal) year/quarter ended June 30, 2021.”

Theresa Chiechi © Investopedia 2022

The income statement focuses on four key items: revenue, expenses, gains, and losses. It does not differentiate between cash and non-cash receipts (sales in cash vs. sales on credit) or cash vs. non-cash payments/disbursements (purchases in cash vs. purchases on credit). It starts with the details of sales and then works down to compute  net income  and eventually earnings per share (EPS) . Essentially, it gives an account of how the net revenue  realized by the company gets transformed into net earnings (profit or loss).

The following are covered in the income statement, though its format may vary, depending upon the local regulatory requirements, the diversified scope of the business, and the associated operating activities:

Operating Revenue

Revenue realized through primary activities is often referred to as operating revenue . For a company manufacturing a product, or for a wholesaler, distributor, or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from the sale of the product. Similarly, for a company (or its franchisees) in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange for offering those services.

Non-Operating Revenue

Revenue realized through secondary, noncore business activities is often referred to as nonoperating, recurring revenue. This revenue is sourced from the earnings that are outside the purchase and sale of goods and services and may include income from interest earned on business capital parked in the bank, rental income from business property, income from strategic partnerships like royalty payment receipts, or income from an advertisement display placed on business property.

Also called other sundry income , gains indicate the net money made from other activities, like the sale of long-term assets. These include the net income realized from one-time nonbusiness activities, such as a company selling its old transportation van, unused land, or a subsidiary company.

Revenue should not be confused with receipts. Payment is usually accounted for in the period when sales are made, or services are delivered. Receipts are the cash received and are accounted for when the money is received.

A customer may take goods/services from a company on Sept. 28, which will lead to the revenue accounted for in September. The customer may be given a 30-day payment window due to his excellent credit and reputation, allowing until Oct. 28 to make the payment, which is when the receipts are accounted for.

A business's cost to continue operating and turning a profit is known as an expense. Some of these expenses may be written off on a tax return if they meet Internal Revenue Service (IRS) guidelines.

Primary-Activity Expenses

These are all expenses incurred for earning the average operating revenue linked to the primary activity of the business. They include the cost of goods sold (COGS); selling, general, and administrative (SG&A) expenses; depreciation or amortization ; and research and development (R&D) expenses. Typical items that make up the list are employee wages, sales commissions, and expenses for utilities such as electricity and transportation.

Secondary-Activity Expenses

These are all expenses linked to noncore business activities, like interest paid on loan money.

Losses as Expenses

These are all expenses that go toward a loss-making sale of long-term assets, one-time or any other unusual costs, or expenses toward lawsuits.

While primary revenue and expenses offer insights into how well the company’s core business is performing, the secondary revenue and fees account for the company’s involvement and expertise in managing ad hoc, non-core activities. Compared with the income from the sale of manufactured goods, a substantially high-interest income from money lying in the bank indicates that the business may not be using the available cash to its full potential by expanding the production capacity, or that it is facing challenges in increasing its market share amid competition.

Recurring rental income gained by hosting billboards at the company factory along a highway indicates that management is capitalizing upon the available resources and assets for additional profitability.

Mathematically, net income is calculated based on the following:

Net Income = (Revenue + Gains) - (Expenses + Losses)

To understand the above formula with some real numbers, let’s assume that a fictitious sports merchandise business, which additionally provides training, is reporting its income statement for a recent hypothetical quarter.

Image by Sabrina Jiang © Investopedia 2022

It received $25,800 from the sale of sports goods and $5,000 from training services. It spent various amounts listed for the given activities that total of $10,650. It realized net gains of $2,000 from the sale of an old van, and it incurred losses worth $800 for settling a dispute raised by a consumer. The net income comes to $21,350 for the given quarter. The above example is the simplest form of income statement that any standard business can generate. It is called the single-step income statement as it is based on a simple calculation that sums up revenue and gains and subtracts expenses and losses.

However, real-world companies often operate on a global scale, have diversified business segments offering a mix of products and services, and frequently get involved in mergers , acquisitions , and strategic partnerships. Such a wide array of operations, diversified set of expenses, various business activities, and the need for reporting in a standard format per regulatory compliance leads to multiple and complex accounting entries in the income statement.

Listed companies follow the multiple-step income statement, which segregates the operating revenue, operating expenses, and gains from the nonoperating revenue, nonoperating expenses, and losses, and offers many more details through the income statement produced this way.

Essentially, the different measures of profitability in a multiple-step income statement are reported at four different levels in a business's operations: gross, operating, pretax, and after-tax. As we’ll see shortly in the following example, this segregation helps in identifying how the income and profitability are moving/changing from one level to the other. For instance, high gross profit but lower operating income indicates higher expenses, while higher pretax profit and lower post-tax profit indicate loss of earnings to taxes and other one-time, unusual expenses.

Let’s look at an example based on the 2021 annual income statements of two large, publicly listed, multinational companies from different sectors: technology (Microsoft) and retail (Walmart).

Reading Income Statements

The focus in this standard format is to calculate the profit/income at each subhead of revenue and operating expenses and then account for mandatory taxes, interest, and other nonrecurring, one-time events to arrive at the net income that applies to common stock. Though calculations involve simple additions and subtractions, the order in which the various entries appear in the statement and their relationships often get repetitive and complicated. Let’s take a deep dive into these numbers for a better understanding.

Revenue Section

The first section, titled Revenue, indicates that Microsoft’s gross (annual) profit , or gross margin, for the fiscal year ending June 30, 2021, was $115.86 billion. It was arrived at by deducting the cost of revenue ($52.23 billion) from the total revenue ($168.09 billion) realized by the technology giant during this fiscal year. Just over 30% of Microsoft’s total sales went toward costs for revenue generation, while a similar figure for Walmart in its fiscal year 2021 was about 75% ($429 billion/$572.75 billion). It indicates that Walmart incurred much higher cost than Microsoft to generate equivalent sales.

Operating Expenses

The next section, called Operating Expenses, again takes into account Microsoft’s cost of revenue ($52.23 billion) and total revenue ($168.09 billion) for the fiscal year to arrive at the reported figures. As Microsoft spent $20.72 billion on R&D and $25.23 billion on SG&A expenses, total operating expenses are computed by summing all these figures ($52.23 billion + $20.72 billion + $25.23 billion = $98.18 billion).

Reducing total operating expenses from total revenue leads to operating income (or loss) of $69.92 billion ($168.09 billion - $98.18 billion). This figure represents the earnings before interest and taxes (EBIT) for its core business activities and is again used later to derive the net income.

A comparison of the line items indicates that Walmart did not spend anything on R&D and had higher SG&A and total operating expenses than Microsoft.

Income From Continuing Operations

The next section, titled Income from Continuing Operations, adds net other income or expenses (like one-time earnings), interest-linked expenses, and applicable taxes to arrive at the net income from continuing operations ($61.27 billion) for Microsoft, which is nearly 60% higher than that of Walmart ($13.67 billion).

After discounting for any nonrecurring events, it’s possible to arrive at the value of net income applicable to common shares. Microsoft had a much higher net income of $61.27 billion compared with Walmart’s $13.67 billion.

Earnings per share are computed by dividing the net income figure by the number of weighted average shares outstanding. With 7.55 billion outstanding shares for Microsoft, its 2021 EPS came to $8.12 per share ($61.27 billion ÷ 7.55 billion). With Walmart having 2.79 billion outstanding shares that fiscal year, its EPS came to $4.90 per share ($13.67 billion ÷ 2.79 billion).

Microsoft had a lower cost for generating equivalent revenue, higher net income from continuing operations, and higher net income applicable to common shares compared with Walmart.

Though the primary purpose of an income statement is to convey details of profitability and business activities of the company to the stakeholders, it also provides detailed insights into the company’s internal activities for comparison across different businesses and sectors. By understanding the income and expense components of the statement, an investor can appreciate what makes a company profitable.

Based on income statements, management can make decisions like expanding to new geographies, pushing sales, expanding production capacity, increasing the use of or the outright sale of assets, or shutting down a department or product line. Competitors also may use them to gain insights about the success parameters of a company and focus areas such as lifting R&D spending.

Creditors may find income statements of limited use, as they are more concerned about a company’s future cash flows than its past profitability. Research analysts use the income statement to compare year-on-year and quarter-on-quarter performance. One can infer, for example, whether a company’s efforts at reducing the cost of sales helped it improve profits over time, or whether management kept tabs on operating expenses without compromising on profitability.

(1) Revenue, (2) expenses, (3) gains, and (4) losses. An income statement is not a balance sheet or a cash flow statement.

Operating revenue is realized through a business' primary activity, such as selling its products. Non-operating revenue comes from ancillary sources such as interest income from capital held in a bank or income from rental of business property.

The income and expense components can help an investor learn what makes a company profitable (or not) . Competitors can use them to measure how their company compares on various measures. Research analysts use them to compare performance year-on-year and quarter-on-quarter.

An income statement provides valuable insights into various aspects of a business. It includes readings on a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers.

AccountingTools. “ Income Statement Definition .”

Microsoft, via U.S. Securities and Exchange Commission. “ Form 10-K for the Fiscal Year Ended June 30, 2021 .”

Walmart, via U.S. Securities and Exchange Commission. “ Form 10-K for the Fiscal Year Ended January 31, 2022 .”

AccountingTools. “ Purpose of the Income Statement .”

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  • Revenue Definition, Formula, Calculation, and Examples 6 of 51
  • Expense: Definition, Types, and How Expenses Are Recorded 7 of 51
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Business Plan Financial Projections

Written by Dave Lavinsky

Business Plan Financial Projections

Financial projections are forecasted analyses of your business’ future that include income statements, balance sheets and cash flow statements. We have found them to be an crucial part of your business plan for the following reasons:

  • They can help prove or disprove the viability of your business idea. For example, if your initial projections show your company will never make a sizable profit, your venture might not be feasible. Or, in such a case, you might figure out ways to raise prices, enter new markets, or streamline operations to make it profitable. 
  • Financial projections give investors and lenders an idea of how well your business is likely to do in the future. They can give lenders the confidence that you’ll be able to comfortably repay their loan with interest. And for equity investors, your projections can give them faith that you’ll earn them a solid return on investment. In both cases, your projections can help you secure the funding you need to launch or grow your business.
  • Financial projections help you track your progress over time and ensure your business is on track to meet its goals. For example, if your financial projections show you should generate $500,000 in sales during the year, but you are not on track to accomplish that, you’ll know you need to take corrective action to achieve your goal.

Below you’ll learn more about the key components of financial projections and how to complete and include them in your business plan.

What Are Business Plan Financial Projections?

Financial projections are an estimate of your company’s future financial performance through financial forecasting. They are typically used by businesses to secure funding, but can also be useful for internal decision-making and planning purposes. There are three main financial statements that you will need to include in your business plan financial projections:

1. Income Statement Projection

The income statement projection is a forecast of your company’s future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

There are a few key items you will need to include in your projection:

  • Revenue: Your revenue projection should break down your expected sales by product or service, as well as by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
  • Expenses: Your expense projection should include a breakdown of your expected costs by category, such as marketing, salaries, and rent. Again, it is important to be realistic in your estimates.
  • Net Income: The net income projection is the difference between your revenue and expenses. This number tells you how much profit your company is expected to make.

Sample Income Statement

2. cash flow statement & projection.

The cash flow statement and projection are a forecast of your company’s future cash inflows and outflows. It is important to include a cash flow projection in your business plan, as it will give investors and lenders an idea of your company’s ability to generate cash.

There are a few key items you will need to include in your cash flow projection:

  • The cash flow statement shows a breakdown of your expected cash inflows and outflows by month. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.
  • Cash inflows should include items such as sales revenue, interest income, and capital gains. Cash outflows should include items such as salaries, rent, and marketing expenses.
  • It is important to track your company’s cash flow over time to ensure that it is healthy. A healthy cash flow is necessary for a successful business.

Sample Cash Flow Statements

3. balance sheet projection.

The balance sheet projection is a forecast of your company’s future financial position. It should include line items for each type of asset and liability, as well as a total at the end.

A projection should include a breakdown of your company’s assets and liabilities by category. It is important to be realistic in your projections, so make sure to account for any seasonal variations in your business.

It is important to track your company’s financial position over time to ensure that it is healthy. A healthy balance is necessary for a successful business.

Sample Balance Sheet

How to create financial projections.

Creating financial projections for your business plan can be a daunting task, but it’s important to put together accurate and realistic financial projections in order to give your business the best chance for success.  

Cost Assumptions

When you create financial projections, it is important to be realistic about the costs your business will incur, using historical financial data can help with this. You will need to make assumptions about the cost of goods sold, operational costs, and capital expenditures.

It is important to track your company’s expenses over time to ensure that it is staying within its budget. A healthy bottom line is necessary for a successful business.

Capital Expenditures, Funding, Tax, and Balance Sheet Items

You will also need to make assumptions about capital expenditures, funding, tax, and balance sheet items. These assumptions will help you to create a realistic financial picture of your business.

Capital Expenditures

When projecting your company’s capital expenditures, you will need to make a number of assumptions about the type of equipment or property your business will purchase. You will also need to estimate the cost of the purchase.

When projecting your company’s funding needs, you will need to make a number of assumptions about where the money will come from. This might include assumptions about bank loans, venture capital, or angel investors.

When projecting your company’s tax liability, you will need to make a number of assumptions about the tax rates that will apply to your business. You will also need to estimate the amount of taxes your company will owe.

Balance Sheet Items

When projecting your company’s balance, you will need to make a number of assumptions about the type and amount of debt your business will have. You will also need to estimate the value of your company’s assets and liabilities.

Financial Projection Scenarios

Write two financial scenarios when creating your financial projections, a best-case scenario, and a worst-case scenario. Use your list of assumptions to come up with realistic numbers for each scenario.

Presuming that you have already generated a list of assumptions, the creation of best and worst-case scenarios should be relatively simple. For each assumption, generate a high and low estimate. For example, if you are assuming that your company will have $100,000 in revenue, your high estimate might be $120,000 and your low estimate might be $80,000.

Once you have generated high and low estimates for all of your assumptions, you can create two scenarios: a best case scenario and a worst-case scenario. Simply plug the high estimates into your financial projections for the best-case scenario and the low estimates into your financial projections for the worst-case scenario.

Conduct a Ratio Analysis

A ratio analysis is a useful tool that can be used to evaluate a company’s financial health. Ratios can be used to compare a company’s performance to its industry average or to its own historical performance.

There are a number of different ratios that can be used in ratio analysis. Some of the more popular ones include the following:

  • Gross margin ratio
  • Operating margin ratio
  • Return on assets (ROA)
  • Return on equity (ROE)

To conduct a ratio analysis, you will need financial statements for your company and for its competitors. You will also need industry average ratios. These can be found in industry reports or on financial websites.

Once you have the necessary information, you can calculate the ratios for your company and compare them to the industry averages or to your own historical performance. If your company’s ratios are significantly different from the industry averages, it might be indicative of a problem.

Be Realistic

When creating your financial projections, it is important to be realistic. Your projections should be based on your list of assumptions and should reflect your best estimate of what your company’s future financial performance will be. This includes projected operating income, a projected income statement, and a profit and loss statement.

Your goal should be to create a realistic set of financial projections that can be used to guide your company’s future decision-making.

Sales Forecast

One of the most important aspects of your financial projections is your sales forecast. Your sales forecast should be based on your list of assumptions and should reflect your best estimate of what your company’s future sales will be.

Your sales forecast should be realistic and achievable. Do not try to “game” the system by creating an overly optimistic or pessimistic forecast. Your goal should be to create a realistic sales forecast that can be used to guide your company’s future decision-making.

Creating a sales forecast is not an exact science, but there are a number of methods that can be used to generate realistic estimates. Some common methods include market analysis, competitor analysis, and customer surveys.

Create Multi-Year Financial Projections

When creating financial projections, it is important to generate projections for multiple years. This will give you a better sense of how your company’s financial performance is likely to change over time.

It is also important to remember that your financial projections are just that: projections. They are based on a number of assumptions and are not guaranteed to be accurate. As such, you should review and update your projections on a regular basis to ensure that they remain relevant.

Creating financial projections is an important part of any business plan. However, it’s important to remember that these projections are just estimates. They are not guarantees of future success.

Business Plan Financial Projections FAQs

What is a business plan financial projection.

A business plan financial projection is a forecast of your company's future financial performance. It should include line items for each type of asset and liability, as well as a total at the end.

What are annual income statements? 

The Annual income statement is a financial document and a financial model that summarize a company's revenues and expenses over the course of a fiscal year. They provide a snapshot of a company's financial health and performance and can be used to track trends and make comparisons with other businesses.

What are the necessary financial statements?

The necessary financial statements for a business plan are an income statement, cash flow statement, and balance sheet.

How do I create financial projections?

You can create financial projections by making a list of assumptions, creating two scenarios (best case and worst case), conducting a ratio analysis, and being realistic.

income statement for business plan

Pro Forma Financial Statements (with Templates and Examples)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 21, 2022

This article is Tax Professional approved

Pro forma definition

According to Merriam-Webster , “pro forma” means:

  • Made or carried out in a perfunctory manner or as a formality
  • Based on financial assumptions or projections

I am the text that will be copied.

Pro forma is actually a Latin term meaning “for form” (or today we might say “for the sake of form, as a matter of form”).

When it comes to accounting, pro forma statements are financial reports for your business based on hypothetical scenarios. They’re a way for you to test out situations you think may happen in the future to help you make business decisions.

There are three major pro forma statements:

  • Pro forma income statements
  • Pro forma balance sheets
  • Pro forma cash flow statements

Pro forma statements look like regular statements, except they’re based on what ifs, not real financial results. As in, “What if my business got a $50,000 loan next year?” Your pro forma statements for that scenario would show what your income, account balances, and cash flow would look like with a $50,000 loan.

Since pro forma statements deal with potential outcomes, they’re not considered GAAP compliant . This is because GAAP compliant reports must be based on historical information.

Pro forma statements don’t need to meet the strictest accounting standards , but must be clearly marked as “pro forma” and can’t be used for things like filing taxes. Using pro forma statements that aren’t marked as such to misrepresent your business to investors, the IRS, or financial institutions can be penalized by the Securities and Exchange Commission).

However, pro forma statements are still extremely useful. They can help you make a business plan, create a financial forecast, and even get funding from potential investors or lenders.

Different but related: you can send clients pro forma invoices to let them know how much their order would be if they placed it today.

Why create pro forma statements?

Creating pro forma statements for future scenarios can help you:

  • Get financed, by showing lenders or investors how you would use their money to sustainably grow your business.
  • Plan for the future, by considering best, worst, and most likely case scenarios in detail.
  • Anticipate changes that may affect your business as it grows, such as entering a new tax bracket.

For these purposes, pro forma statements are typically created as a part of a financial forecast in financial accounting. Big corporations who have in-house accountants use pro forma statements for financial modeling and forecasting different scenarios.

Pro forma statements vs. budgets

It may be tempting to think of a pro forma statement as the same as a business budget . After all, you create both in anticipation of the future. And both help you plan how you’ll use your money. But budgets and pro forma statements are two distinct financial tools.

Think of it this way: A pro forma statement is a prediction, and a budget is a plan. Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions.

For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year. So, when you create next year’s budget, you can include that extra $7,000—maybe spending $4,000 over the course of the year to pay down the principal on a loan , while adding $3,000 to savings.

Types of pro forma statement

There are four main types of pro forma statements. While they all fall into the same categories—income statement, balance sheet, and cash flow statement—they differ based on the purpose of the financial forecast.

1. Full-year pro forma projection

This type of pro forma projection takes into account all of your financials for the fiscal year up until the present time, then adds projected outcomes for the remainder of the year. That can help you show investors or partners what business finances could look like by the end of the fiscal year.

2. Financing or investment pro forma projection

You may be courting investors or trying to convince your business partners of the value of a capital investment or additional financing. In that case, you can use a financing pro forma projection to make your case. It takes into account an injection of cash from an outside source—plus any interest payments you may need to make—and shows how it will affect your business’s financial position.

3. Historical with acquisition pro forma projection

This type of pro forma projection looks at the past financial statements of your business, plus the past financial statements of a business you want to buy . Then it merges them to show what your financials would have looked like if you made a business combination (or merger) earlier. You can use this scenario as a model of what may happen in the future if you buy the other business and restructure now.

4. Risk analysis pro forma projection

Looking at both best case and worst case scenarios helps you make financial decisions based on challenges you may face in the future. For instance, what happens if your main vendor raises their prices like they did last year? Or how will that proposed transaction of buying new equipment impact you long term? Risk analysis lets you take the future for a test ride, and try out different outcomes.

Pro forma templates

To create a pro forma statement, you can use the same template you’d use for a normal financial statement. You may want to use Bench’s free templates:

  • Income statement
  • Balance sheet
  • Cash flow statement

How to create pro forma statements

The sample pro forma statements below may look different from the statements you create, depending on what your template looks like. But generally, these are the steps you need to take to create them—and the info your pro forma statements should include.

Creating a pro forma income statement

There are five steps to creating a pro forma income statement:

  • Set a goal for sales in the period you’re looking at. Let’s say you want to increase your income by $18,000 over the course of one year.
  • Set a production schedule that will let you reach your goal, and map it out over the time period you’re covering. In this case, you’ll want to earn an additional $1,500 income every month, for 12 months.
  • Plan how you’ll match your production schedule. You could do this by growing your number of sales a fixed amount every month, or gradually increasing the amount of sales you make per month. It’s up to you—trust your experience as a business owner.
  • It’s time for the “loss” part of “ Profit and Loss .” Calculate the cost of goods sold for each month in your projection. Then, deduct it from your sales. Deduct any other operating expenses you have, as well.
  • Prepare your pro forma income statement using data you’ve compiled in the prior four steps.

One note: your pro forma statements will be much more accurate if your bookkeeping is up to date. That way, when you project future periods, you’re basing it off the reality of your business today.

How Bench can help

To predict the future, you first need to understand the past. With Bench, you get a crystal clear image of your financial history so you can focus on planning your future. We’re America’s largest bookkeeping service helping thousands of business owners better understand the financial health of their operations so they can keep focused on growth and planning. When it comes time to create a pro forma statement, you have reliable numbers and reports to get started. We may not be a crystal ball, but we’re the next best thing. Learn more .

Example pro forma income statement:

Rosalia’s Reliable Recordings

Creating a pro forma cash flow statement

You create a pro forma cash flow statement much the same way you’d create a normal cash flow statement. That means taking info from the income statement, then using the cash flow statement format to plot out where your money is going, and what you’ll have on hand at any one time. This pro forma statement can be part of a larger cash flow forecast used for decision making.

Your projected cash flow can give you a few different insights. If it’s negative, it means you won’t have enough cash on-hand to run your business, according to your current trajectory. You’ll have to make plans to borrow money and pay it off.

On the other hand, if net cash flow is positive, you can plan on having enough extra cash on hand to pay off loans, or save for a big investment.

Example pro forma cash flow statement

Mickie’s Murakami Museum

Creating a pro forma balance sheet

By drawing on info from the income statement and the cash flow statement, you can create pro forma balance sheets. However, you’ll also need previous balance sheets to make this useful—so you can see how your business got from “Balance A” to “Balance B.”

The balance sheet will project changes in your business accounts over time. So you can plan where to move money, when.

Example pro forma balance sheet

Daily Dumpling Deliveries

Once you’ve created your pro forma income statements, and cast your eyes forward to the future of your business, you can start planning how you’ll spend your money. It’s time to create a small business budget .

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income statement for business plan

How to write a balance sheet for a business plan

Table of Contents

What is a balance sheet?

Elements of a balance sheet, liabilities, how to write a balance sheet, manage your business finances with countingup.

A balance sheet is one of three major financial statements that should be in a business plan – the other two being an income statement and cash flow statement .  

Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it’s actually fairly simple. 

To help you write the perfect balance sheet for your business plan, this guide covers everything you need to know, including:

  • What are assets?
  • What are liabilities?
  • What is equity?

A balance sheet is a financial statement that shows a business’ “book value”, or the value of a company after all of its debts are paid. 

For those inside the business, it provides valuable financial insights, allowing the owners to assess their current financial situation and plan for the future. 

For external investors, a balance sheet lets them know whether it’s a worthwhile investment.  

Putting a balance sheet together isn’t all that difficult. You just need to know the value of three things:

  • Owner’s equity

Once you know these three figures, there’s just a little bit of maths – nothing too scary though.

Assets are items or resources that have financial value. They might be physical items, machinery and vehicles, or they could be intangible items, like copyrights or brand identity .

Assets are separated into two groups based on how quickly you can turn them into cash. There are current assets and fixed assets. 

Current assets are things that are fairly simple to value and sell, such as:

  • Stock and inventory
  • Cash in the bank
  • Money owed to you (through unpaid invoices )
  • Customer deposits
  • Office furniture, equipment or supplies
  • Phones or laptops
  • Even relatively trivial items like a coffee machine or pool table

Fixed assets are valuable items that take much longer to sell, such as:

  • Property or buildings
  • Specialised equipment for your business operations
  • Investments
  • Vehicles 

On your balance sheet, the asset column is the simplest. All you need to do is list each item your business owns, along with their individual values, in a separate column. Then, add up the values to get a total at the bottom. 

Liabilities are the funds that you owe to other people, banks, or businesses. They can be:

  • A business loan (the total, not the monthly payment amount)
  • A mortgage or rent payment on a property
  • Supplier contracts you owe
  • Your accounts payable total
  • Other financial obligations, such as paying wages or freelancers for support
  • Taxes you’ll owe to HMRC

List these in the same way you did with your assets – on a spreadsheet with their values in a separate column. 

When you know the value of your assets and liabilities, working your equity is simple – it’s just the total value of your assets, minus the total value of your liabilities. 

Record the owner’s equity in the same column as your liabilities. When you add them all up, it should be the same value as your assets. 

After you’ve totalled up your assets, liabilities, and owner’s equity, all that’s left to do is fill in your balance sheet. 

Using a spreadsheet, record your assets on the left and your liabilities and owner’s equity on the right. 

For example, here’s what a balance sheet might look like for a painter and decorator:

If you’ve recorded everything correctly, both sides should have the same total. Whenever you make a change, the balance sheet will change, but it should still be balanced. 

For example, let’s say our painter and decorator sold their equipment. In that case, they’d lose an asset worth £200, but they’d also gain £200 in cash, so the asset total would stay the same. 

Alternatively, let’s say they lost the equipment altogether and got no money for it. In that case, they’d lose £200, leaving their asset total at £5,600. Then, they’d have to adjust the other side, so it remains balanced, like this:

If your two totals are not balanced, it’s most likely for one of these reasons:

  • Incomplete or missing information
  • Incorrect data entry
  • A mistake in exchange rates
  • And inventory miscount

Basically, if things don’t look right, try not to panic. It’s normally a simple mistake, so go over the figures again and you’ll find the culprit. 

The trickiest part of writing a balance sheet for a business plan is accurately recording financial information. 

With the Countingup business current account, you’ll have access to a digital record of all your transactions in one simple app, giving you all the financial information you’ll need for a business plan.

Start your three-month free trial today. 

Find out more here .

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How to Create a Financial Plan for Your Business

create financial plan

Home » Blog » How to Create a Financial Plan for Your Business

A wise old Certified Public Accountant gave me some priceless advice when I began my entrepreneurial journey.

“If the math doesn’t work, neither will your business.” 

Upon seeing my blank expression, he explained it a little further.

“A successful business earns more than it spends, and you ensure that happens (within reason) by creating a financial plan that controls every dollar you make.”

How so? I asked.

“Because your financial plan empowers you to control your cash flow, prepare for uncertainties, and take advantage of future opportunities.”

That’s when I knew I needed one.

If so, my step-by-step guide explains how to create a business financial plan that reflects your goals and controls every dollar you make.

What is a financial plan?

At its most basic level, a business financial plan is a document that shows you what money flows in and out of your business, how you earn it, and where you spend it. 

Similar to businesses, no 2 financial plans are the same.

However, a solid financial plan contains several components, including an income statement, cash flow statement, personnel plan, balance sheet, financial projections, and break-even analysis. 

Together, these enable you to control your budget, highlight potential future risks, set goals, calculate your funding requirements, and implement strategies to achieve them. 

While there’s no such thing as a sure thing in life, your financial plan brings your future into your present so that you can control it now.

Why is a financial plan important for a small business?

As you know (or will when you start your business ), entrepreneurs work long hours and make many decisions to ensure their business is on track. A business financial plan helps remove uncertainty from those decisions, replacing it with figures you can rely on and preparing you to take full advantage of investment opportunities when they arise. 

Here’s what Warren Buffet says about opportunities:

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Your financial plan ensures you’ve got a bucket!

We also use a financial plan to control our cash flow, forecast our future financial business performance (including our income, expenses, and profitability), and stay within budget. 

Together, these help us maximize our assets, confidently navigate any problems during our entrepreneurial journey, and convince investors to believe in our vision. 

What is the difference between a business financial plan and a personal financial plan?

While most financial plans include the same information, some essential differences exist between business and personal plans because your goals likely differ from those of your SMB.

For example, an individual’s financial plan might include retirement, investment strategies, a minimum annual income to reduce tax liabilities, and securing an estate for their children.

In contrast, a business’s financial plan might focus on hiring additional staff, increasing inventory, bringing new products online, expanding into other markets, and even a new brick-and-mortar location. 

As you can see, the goals differ from one to the other, as might yours. That’s why a financial plan is as unique as the business it serves; however, some elements are vital for every financial business plan! 

The key components of a business financial plan

We now know that a thorough financial plan is imperative to the success and stability of your small business. 

Here are the components that can help make that happen:

  • Income Statement: Contains information on your revenue, profits, and losses.
  • Cash flow statement: Documents how money flows in and out of your business. 
  • Balance sheet: Shows your business assets and expenses at a specific time.
  • Financial projections: This helps predict your future income and expenses.
  • Personnel plan: Identifies if and when you should hire employees.
  • Break-Even Analysis: Confirms when you’ll make a profit.

Okay, now let’s look at how you use them to create yours:

How to Create a Business Financial Plan

To create your business financial plan, you must first collect financial information relevant to the 6 critical components you’ll use for its structure. 

Budding entrepreneurs who have yet to start their businesses might be wondering, `How do I collect information I haven’t got?` 

Good point!

Here’s where your business plan comes into play because it contains a financial section that includes your startup and running costs , financial projections, and break-even analysis. 

And those are 3 of the critical components in your business financial plan!

1. Income statement

An income statement (also known as a pro forma income or profit-and-loss statement) contains information on revenue, profits, losses, and fixed and variable operating expenses over a specific period, such as monthly, quarterly, or yearly.

It includes 2 columns containing your income and expenses and, at the bottom, your net profit or loss total.

Here’s an example of how it should look:

  • Cost of goods sold (COGS) and operating expenses: These are the direct costs of producing your goods or services and the costs for running your business, such as rent, utilities, wages, insurance, licenses, etc.
  • Revenue streams: Usually direct sales or ongoing subscriptions/
  • Total net profit or loss: Subtract your costs (and taxes) from your total gross profit.
  • Net income: Your total income after you subtract your expenses and taxes.

Next comes your cash flow statement, which might initially look like your income statement, but there are distinct differences.

Your income statement calculates your business’s revenues, expenses, and profits and reflects its financial performance. Your cash flow statement shows where you earn and spend your money, which is essential for staying within budget and paying your bills. 

2. Cash flow statement

Most small businesses need regular cash injections to survive.

But did you know that a lack of cash is the number one reason 82% of small US businesses fail? Source: USChamber.com .

So, it’s crucial to control it using a cash flow statement. 

A cash flow statement for established businesses could include bank statements showing credits (profits) and debits (expenditures). Startups with little cash flow information could include their startup and running costs and any funding sources. 

You can create a cash flow statement using two columns, one for your income and the other for your expenditures. 

And add the name, date, and invoice/receipt number to each transaction to make it easy to follow and correlate with your invoices and receipts. Trust me, your bookkeeper will love you for it!

3. Balance sheet

Your balance sheet is a financial snapshot of your business at a specific moment that lets you view your liabilities, assets, equity, and any up-and-coming extra expenses.

You use a balance sheet to subtract your debts (liabilities) from what you own (assets) to show you your net worth, also known as equity.

Let’s break those down so you know what they involve:

Liabilities: 

Your liabilities are business debts, such as outstanding inventory fees, utility bills, employee wages or compensation, and unpaid taxes.

These fall into 2 categories: current and fixed. 

  • Your current assets can include your business bank balance, available cash, and outstanding invoices, known as accounts receivable.
  • Your fixed assets include tangible things like your business property, equipment, vehicles, or land.

Note: Some businesses also have intangible assets, such as patents and copyrights.

Your business equity is the value of your assets minus your liabilities, which could also include any stock and share options.

4. Financial projections

A financial projection (also called an income projection) forecasts how much money you think might flow in and out of your business over a set period based on past performances or for startups on their business plan’s market research .

Financial projections can help you in several ways, including:

  • Many small businesses need financial projections to identify and prepare for slow sales because of low seasonal demand or a shift in consumer buying trends.
  • Your financial projections help you understand the cash you need to reach your business goals by estimating their costs.
  • Most new businesses need solid (believable) financial projections to get funding, as they help show you can repay your debts.
  • And to help entrepreneurs running a side hustle know when they can take it full-time .

To create your income projection, estimate your future sales income minus your fixed and variable expenses.

5. Personnel plan

Most businesses need the right people to meet their goals and maintain a healthy cash flow.

You use a personnel plan to determine whether to hire employees and if they should be full-time, part-time, freelancers, or contractors on a need-only basis. 

Your personnel plan also calculates employee costs like wages, benefits, worker’s compensation insurance, and payroll taxes to ensure you only hire when you can afford to.

6. Break-even analysis

Your break-even analysis projects when you’ll recoup your investment and earn more than your spending to run your business.

You calculate your break-even date by dividing your variable and fixed costs by your gross profit margin to get a financial figure your business must make to break even.

Need help to determine what your fixed and variable costs are?

No worries:

  • Your fixed costs include expenses that remain the same regardless of how many products or services you sell. These include your rent, insurance policies, license and permit expenses , accounting fees, and wages.
  • Your variable costs fluctuate relative to your sales or production volume.

The takeaway:

Your break-even analysis tells you the number of products or services you must sell to cover your business and production costs. 

Tips on creating an effective financial plan for your business

Preparation is the key to creating a business financial plan, and you prepare by setting goals, assessing present and future credit needs, estimating every business expense, planning for contingencies, and seeking professional financial advice if required. 

And once your plan is in place, regular monitoring helps ensure your business is on its financial target.

Let’s look at how you do it:

Set your financial goals

Your goals are relative to your business. Some examples include forming an LLC , hiring employees, expanding your product range or services, entering a new marketplace, opening a new branch, or trading abroad.

You must define them (regardless of what they are) because your financial plan aims to help you achieve them.

Consider this proverb when choosing your financial business goals:

“The art is not in making money, but making your money work for you.”

And that’s pretty much the secret to how people get rich!

That’s why now is the time to define your goals and create a strategically driven financial business plan that guides every business decision and ensures you maximize your investments.

Speaking of which!

Know your credit needs 

Your business credit needs are any loans you require when starting, running, or expanding your business.

As most small business owners know, the golden rule in running a small business is to minimize your expenditures because the less money you borrow, the higher your profits and the more accurate your business financial plan will be.

But sometimes, we must borrow to exploit market opportunities , buy equipment, or expand, and knowing your credit needs (and score) can help you get the best deals.

Include those little expenses

No income or expense is too small to consider when running a business that relies on a consistent cash flow.

Benjamin Franklin put it this way:

“Beware of little expenses. A small leak will sink a great ship.” 

The problem many new business owners experience is that it’s easy to account for significant expenses (especially fixed costs), but it’s the small, variable everyday ones that can catch us out and scupper our budget. 

To avoid a sinking feeling, evaluate your monthly fixed and variable expenditures and avoid unnecessary, unbudgeted expenses at all costs.

Monitor your goals

Creating your financial plan is your first step, implementing it the second, and monitoring it the third because that’s how you ensure your strategies are achieving your financial goals. 

To monitor your goals, use those key elements of your business financial plan, including your income and cash flow statement, balance sheet, and financial projections, as they provide an up-to-date assessment.

Regular monitoring also helps you identify potential problems and implement any changes before they harm your business’s financial health. 

Plan for contingencies

Planning for problems relative to your niche, like seasonal fluctuations and new competitors, is standard best business practice. But as recent history has taught us, we must also prepare for the unforeseeable!

You can spot worst-case scenarios (like a falling income) by evaluating your business financial plan’s balance sheet and cash flow statement.

Some ways to plan for contingencies are to have a credit line available and cash reserves that can help keep you afloat should the going get rough. 

Consider hiring help 

Many of the most successful business leaders have a shared secret to their success!

They surround themselves with people who know more than they do about every aspect of their business. 

Steve Jobs explains it perfectly:

“It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”

Fortunately, financial experts are available to help you create your business financial plan.

Consider hiring a financial advisor to inform you of prudent financial decisions and investments, and your bank manager can help assess your creditworthiness while considering any past problems that could affect present loan applications.

Financial planning FAQs

What is a business financial plan.

An effective business financial plan contains your business goals and outlines your strategies.

It’s a GPS that guides your SMB’s financial activities by ensuring you make informed decisions on how and where to invest your resources. 

How do you write a business financial plan?

Your financial plan begins with a strategic plan that contains your business goals and what you’ll need to achieve them.

Next, you must create your financial projections, plan for contingencies, and monitor to assess your actual results against your projections to adjust if required. 

What are the 6 components of a financial plan?

Financial plans are as unique as the business they serve. However, 6 components you must include are:

  • Cash flow statement: Documents how money flows in and out of your business.
  • Personnel plan: Identifies whether you should hire employees.
  • Break-Even Analysis: Confirms when you'll make a profit.

What is the best financial statement for a small business?

Your income statement best assesses your business’s financial performance, containing your profits, losses, and equity.

Your balance sheet and cash flow statement are also crucial for running a profitable business. 

Entrepreneurs need many skills, and one of the most important is financial intelligence because it ensures we keep our fingers on our businesses’ financial pulse.

Learning how to create a business financial plan is a great way to gain that skill.

And when you control your income and expenditures, you take control of your business’s financial destiny. Sweet.

One last thing to remember when creating a business financial plan.

The numbers never lie!

This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.

Terry O'Toole

Terry OToole

Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.

IMAGES

  1. Download Free Income Statement Templates and Examples

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  2. Business Plan Financial Templates

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  3. 41 FREE Income Statement Templates & Examples

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  4. FREE 9+ Sample Income Statement Templates in PDF

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  5. 41 FREE Income Statement Templates & Examples

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VIDEO

  1. Financial Management

  2. Estado de Resultados en Inglés, Income Statement . Business Vocabulary #vocabulary #business

  3. Invoices Management Software

  4. The Basics of an Income Statement for Investors

  5. STATEMENT OF COMPREHENSIVE INCOME AND NOTES TO FINANCIAL STATEMENTS

  6. PREPARING FINANCIAL STATEMENT INCOME STATEMENT BUSINESS DATA ANALYTICS

COMMENTS

  1. How to Write an Income Statement for Your Business Plan

    An income statement is your business's bottom line: your total revenue from sales minus all of your costs. Opinions expressed by Entrepreneur contributors are their own. This is part 2 / 11 of ...

  2. Business Plan Financial Templates

    Download and prepare free financial templates for your business plan, including income statement templates, cash flow statement templates, balance sheet templates, and more. Learn the key elements of the financial section of a business plan and how to use them to project your financial health and performance.

  3. Small Business Income Statement Templates

    A small business income statement template is a financial statement used to report performance. Templates include calculations for revenue, expenses, and overall profit and loss, and they are used to document, analyze, and project business finances. ... Budget: A budget is a spending plan for your business based on your estimated income and ...

  4. How to Prepare an Income Statement

    Steps to Prepare an Income Statement. 1. Choose Your Reporting Period. Your reporting period is the specific timeframe the income statement covers. Choosing the correct one is critical. Monthly, quarterly, and annual reporting periods are all common. Which reporting period is right for you depends on your goals.

  5. Business Plan Income Statement: Everything You Need to Know

    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 ...

  6. Business Plan Essentials: Writing the Financial Plan

    The Income Statement. The Cash Flow Projection. The Balance Sheet. Photo: Jetta Productions Inc/Getty Images. Was this page helpful? Learn how to write the financial plan section of your business plan: income statement, cash flow projections, and balance sheet (templates included).

  7. Why The Income Statement Is Crucial To Your Business

    In the pizza parlor example, the revenue in the income statement represents all the money earned from sales of all food and drink for each year. Revenue in year one totaled $300,000 and in year ...

  8. How to Create a Profit and Loss Statement and Forecast

    An income statement, also called a profit and loss statement (or P&L), is a fundamental tool for understanding how the revenue and expenses of your business stack up. ... If you're writing a business plan document and don't yet have money coming in, you might be wondering how you would arrive at a sales number for a financial forecast. It ...

  9. Your Income Statement Guide: Examples, Advice and Definitions

    It lists assets and liabilities as well as equity. Both statements provide important information for understanding the overall financial health of a business. Using Your Income Statement to Create a Financial Plan. Creating a financial plan using your income statement is an important step in planning for future success.

  10. Financial Statements for Business Plans and Startup

    Financial Statements You Will Need. A startup budget or cash flow statement. A startup costs worksheet. A pro forma (projected) profit and loss statement. A pro forma (projected) balance sheet. Sources and uses of funds statement. Break-even analysis.

  11. How to Write an Income Statement for Your Business Plan

    An income statement shows whether you are making any money. It adds up all your revenue from sales and other sources, subtracts all your costs, and comes up with the net income figure, also known as the bottom line. Income statements are called various names—profit and loss statement (P&L) and earnings statement are two common alternatives ...

  12. Financial Statements for Your Business Plan

    Everything referenced in the text of the business plan must be included in the financial statements. For example, if the business plan says that there will be 15 people on the payroll at the end of the first year, the payroll section of the income statement must show the payroll expense for 15 people at month 12.

  13. Sample Business Plan Income Statement

    An income statement summarizes your revenue and costs and shows your net profit in your business plan. Take a look at how a gift shop called Broad Street Emporium uses income statements to manage business finances. The figure shows the company's annual revenues, costs, and profits for the most recent year as well as for the previous year.

  14. Income Statement

    A Real Example of an Income Statement. Below is an example of Amazon's consolidated statement of operations, or income statement, for the years ended December 31, 2015 - 2017. Take a look at the P&L and then read a breakdown of it below. Source: amazon.com. Learn to analyze an income statement in CFI's Financial Analysis Fundamentals Course.

  15. How to Prepare a Financial Plan for Startup Business (w/ example)

    Whether creating a financial plan from scratch for a business venture or just modifying it for an existing one, here are the key components to consider including in your startup's financial planning process. Income Statement. An Income statement, also known as a profit-and-loss statement(P&L), shows your company's income and expenditures ...

  16. Pro Forma Business Plan Template & Financial Statements

    Pro Forma Income Statements for a Business Plan. Pro forma statements for a business plan can take many different forms, but they all typically include information on sales forecasts, expenses, capital expenditure plans, and funding requirements. A pro forma statement that is included in a business plan template should also include financial ...

  17. 4 Key Financial Statements For Your Startup Business Plan

    Financial Statement #1: Profit & Loss. The profit and loss (P&L), also referred to as "income statement", is a summary of all your revenues and expenses over a given time period. By subtracting expenses from revenues, it gives a clear picture of whether your business is profitable, or loss-making. With the balance sheet and the cash flow ...

  18. Income Statement: How to Read and Use It

    Income Statement: An income statement is a financial statement that reports a company's financial performance over a specific accounting period . Financial performance is assessed by giving a ...

  19. What Is An Income Statement?

    The income statement, also known as the profit and loss statement, is an important tool as it calculates the profitability or loss of a business. Income statement with calculator and pen. Income ...

  20. Business Plan Financial Projections

    There are three main financial statements that you will need to include in your business plan financial projections: 1. Income Statement Projection. The income statement projection is a forecast of your company's future revenues and expenses. It should include line items for each type of income and expense, as well as a total at the end.

  21. Pro Forma Financial Statements (with Templates and Examples)

    Your budget may be based on the financial information of your pro forma statements—after all, it makes sense to make plans based on your predictions. For example: Your income this year is $37,000. According to your pro forma annual income statement, your financial projections show it will be $44,000 next year.

  22. The 10-part business plan & downloadable template

    Follow along this 10-step guide to learn how to write a business plan. Download the business plan template to set your small business up for success. ... For existing businesses: Income statement template; Once complete, create a big picture representation to include here as well as in your objectives in step two. 8. Your organization & management.

  23. How to Write a Balance Sheet for a Business Plan

    A balance sheet is one of three major financial statements that should be in a business plan - the other two being an income statement and cash flow statement. Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it's actually fairly simple.

  24. How to Create a Financial Plan for Your Business

    To monitor your goals, use those key elements of your business financial plan, including your income and cash flow statement, balance sheet, and financial projections, as they provide an up-to-date assessment. Regular monitoring also helps you identify potential problems and implement any changes before they harm your business's financial health.

  25. How To Write A Successful Business Plan For A Loan

    A business plan is a document that lays out a company's strategy and, in some cases, how a business owner plans to use loan funds, investments and capital. ... Income statements; Capital ...