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.
