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Income statement forecasting is a necessary process that all businesses must undertake so that they can properly adjust their budgets for years to come. It is important that this process takes place one year at a time and that realistic projections are made for all of the pertinent financial aspects. One way to do income statement forecasting is to use the percentage of sales method, in which sales is the driver for other key income statement components like expenses and costs. After all of the projections are made, a company can simply subtract projected costs and expenses from expected sales totals to arrive at a rough estimate of future net income.
Even though companies must always be concerned with their daily operations, they must also take care to keep one eye on the future at all times. Although it is impossible to predict financial conditions with absolute accuracy, firms must make an attempt to project their pertinent business information into the future. Financial statements, which report all of a company's important business information, must be forecast into future years, and income statement forecasting is a crucial part of those efforts.
It is important to take a yearly approach when performing income statement forecasting. Trying to project too far down the road can lead to inaccuracy. In addition, management and chief financial officers must make sure to keep their projections realistic. For example, making unrealistically good predictions of future sales can lead to budgets that are way out of proportion. Factoring in economic volatility will also help keep income statement forecasts accurate.
One of the most common and effective ways of income statement forecasting is the percentage of sales approach. Since sales totals tend to stay in proportion with other income statement items, making an accurate sales projection should also translate to accurate representations of costs and expenses. For example, if costs are generally 80 percent of sales, this percentage should hold up even as sales increase or decrease.
If these projections are made with good accuracy, all that remains for income statement forecasting to be completed is to add up all the totals. Revenue from sales is the main positive force in an income statement, from which all costs and expenses are subtracted. Cost of goods sold is the driving force behind cost projections, while expenses relate to operations, administration, and interest and taxes. The final projection is the net income, which is projected revenue minus expenses. Projected net income is how much money a company expects to earn in some future year.