5. Constructing the INCOME STATEMENT

Constructing the INCOME STATEMENT

To determine one’s sales you have to list your products, list your selling prices, “guestimate” how many you are going to sell – that will give you a turnover figure.
This forms the basis of your pro forma income statement.

The next thing to do is to determine your cost of sales. You can only do that if you know what things cost. You do have to do a supplier “recci” – talk to suppliers, get price lists, check the market out. Find out what acceptable mark-ups are for the industry? Visit sellers of the product – what do they sell the item for?

Here is a bit of a mock up of the process:

Calculating sales:

Product A sell R200 Quantity sold pm 4 800

Product B sell R250 Quantity sold pm 6 1500

Product C sell R210 Quantity sold pm 2 420

Product D sell R 50 Quantity sold pm 3 150

Product E sell R 20 Quantity sold pm 8 160

Product F sell R20 Quantity sold pm 1 20

Product G sell R620 Quantity sold pm 2 1240

Total sales 4290

If your markup is 100%

Then your cost of sales* will be 2145

That gives you a GP of 2145

If your (indirect) costs are 1000

Your net profit is (before tax) 1145


* You will also calculate your costs of sales separately from your knowledge and quotes that you obtained from you suppliers. Then one would extrapolate it over the whole year to get an annual figure.

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Here is more:

The income statement is a simple and straightforward report on the proposed business’s cash generating ability. It gives the sales made within a given time period and how much it costs to generate those sales.

It gets its information from other financial calculations that one would have developed earlier – such as sales and revenue forecasts, expense forecasts, depreciation on capital, loan repayments and cost of goods. By putting these things together, the income statement shows how much your business makes or loses during the period. One does that by subtracting the cost of goods from revenue to arrive at Gross profit and then subtracting the other costs to arrive at a net result – which is either a profit or a loss.

Normally, for the business plan one would at least show the profit and loss statement for the first year. This is constructed by listing ones financial projections in the following way:

1. Income
2. Cost of Goods
3. Gross profit
4. Operating expenses
5. Total expenses
6. Net profit
7. Depreciation
8. Net profit before interest
9. Interest
10. Net profit before taxes
11. Taxes
12. Profit after taxes

Here is a simplified Income Statement:

Income Statement for the period XXXX to XXXX

Sales (turnover) XXXXXXXX

LESS Cost of sales (variable cost) XXXXXXXX

(opening stock + plus purchases – closing stock – applicable for retail businesses)

= GROSS PROFIT XXXXXXXX

LESS Expenses (overheads)
Eg.
Rent
Telephone
Transport costs
Owners salary
Wages
Advertising
Insurance
Depreciation
= NET PROFIT before INCOME TAX

LESS Income tax
= NET PROFIT after tax