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Does a New Business Need an Income Statement

The short answer is yes! The Income Statement provides a systematic method of recording estimates of sales, cost of goods sold, and expenses and deriving the profit or loss resulting from business operations. The Income statement is often referred to as the Profit and Loss (P&L) statement.

income statement for new businessExpenses include such items as wages and benefits, advertising, rent, utilities, insurance and taxes. For a business using the accrual method of accounting, additional entries must be made for accruals for payroll and other taxes, insurance, and the like. For a business using the accrual method it is highly recommended that an accountant be used to handle the books.

The Income Statement also forms the basis for generating cash flow projections. It differs from the Cash Flow Statement primarily in including non-cash tax-deductible expenses such as amortization, depreciation and provisions for inventory losses and bad debts. The Income Statement does not include non-deductible expenditures, which affect cash flow. Some examples of these expenses are pre start-up costs, purchase of capital equipment, payment of principal on loans, dividends and distributions to owners, and cash infusion such as from sales of capital stock and/or loans or additional investments from the owners.

Projections

Before an Income Statement can be completed and a pricing structure established, it is necessary to know or to estimate various important factors of the business, for example: What are the variable costs (i.e., those dependent on unit sales) to provide the product or service? What are the fixed costs of just being in business? At what sales level does the business at least break even? At the projected sales level, does the pricing allow the business to operate at a reasonable profit and still remain competitive?

The statement should also provide for comparing estimated and actual sales, and expenses and profit as they become known. The entries listed on the attached sample form will not necessarily apply to every business and some entries may not be included which would be pertinent to specific businesses. It is suggested, therefore, that the form be adapted to the particular business for which the projection is being made, with appropriate changes in the entries as may be required.

The sales forecast is probably the most difficult part of the business to estimate – especially for a starting business.

Below is an outline of the projected income statement.

Income Statement

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