What is a Budgeted Income Statement?
A budgeted income statement is a financial report that compares the budgeted revenue and expense figures with the actual performance numbers achieved during the period. In other words, it’s a report that lists the predicted numbers side-by-side with the actual numbers to show the company performance compared with the expected performance.
The budgeted income statement contains all of the line items found in a normal income statement, except that it is a projection of what the income statement will look like during future budget periods. It is compiled from a number of other budgets, the accuracy of which may vary based on the realism of the inputs to the budget model.
The budgeted income statement is extremely useful for testing whether the projected financial results of a company appear to be reasonable. When used in combination with the budgeted balance sheet, it also reveals scenarios that are not financially supportable (such as requiring large amounts of debt), which management can remedy by altering the underlying budget assumptions.
What Does Budgeted Income Statement Mean?
Management uses the budgeted income statement to track how well both departments and the company as a whole is performing during a period. At the beginning of each period, management typically sets budget and performance goals that they expect the company to meet. These goals are based on performance in prior periods as well as management’s growth expectations.
Since these budgeted numbers are based on predictions and expectations, they are rarely accurate. Departments rarely hit their estimated performance numbers exactly. It’s more often that they exceed or fall short of these goals. The budgeted income statement keeps track of the variances or differences between the actual and budgeted numbers.
Why Does It Matter?
Whether you’re planning to buy new equipment, hire more people or expand your services, proper budgeting can help you plan your next steps. By preparing a budgeted income statement, you’ll be able to estimate your revenue and expenses — and make a decision accordingly.
Managers can use this financial report to justify the resources they need for a specific project, attract investors and coordinate their efforts with other departments. For example, they may communicate the number and types of products listed on this document to the manufacturing department to ensure adequate inventory levels.
The University of Adelaide points out that proper budgeting can assist with risk management, resource allocation and goal setting. At the same time, it encourages employees to work together toward a clear goal. Moreover, it allows organizations to evaluate any adverse changes in trade conditions and mitigate their impact on the company’s bottom line. These insights can also help you determine whether or not you need financing and how to use your existing resources more efficiently.