Calculating the business results

By conducting a business an entrepreneur expects to earn profits. If the profit of the business at the end of a specific period is to be identified at present, such expected profit should be forecasted by considering the expected income and expenses.

The forecasted income statement included in the financial plan (a main component of a business plan) fulfills the above requirement of the entrepreneur.

The forecasted income statement includes the following things.

$ Estimated total income.
$ Estimated total expenses.
$ Expected business result.

Estimated total income

The total value of the products or services sold by a business during a specific period of time is known as estimated sales income. Both the cash sales and the credit sales should be considered here. Similarly, if there are other income a business expects to earn, they should also be included here. Accordingly, the total expected income includes the sales income and other income expected to be earned during the period.

Estimated total expenses

All the expenses expected to incur for the products and services which are to expected be sold during a specific period of time is known as estimated total expenses. When calculating this expenditure, production cost and non-production cost should be stated separately.

Production cost

Expenses that directly contribute to the production of the business come under this category. When calculating the production cost following cost should be considered.

Material cost.
Labour cost.
Other costs (overhead cost).

Non production expenses

Expenses that do not directly relate to the production activities of the business come under this category. They are;

Selling and distribution expenses included in the marketing plan.
Administrative expenses included in the administrative plan.
Financial expenses included in the financial plan (e.g. loan interest).

Expected business result

Expected business result can be calculated by deducting the estimated total expenses from the expected total income. This can be a profit or a loss. The decision to start the business can be made, if the result is a profit and if the investor is satisfied that the profit is adequate for the money invested.

If the result is a loss, it guides the entrepreneur to make a decision as not to start the business when faced with a loss making situation.


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