How to Make Income Projections
- 1). Gather historical or past financial information relating to expenses and revenue. Look for a prior period income statement for this information. Some of the revenue and expense accounts on the income statement are gross sales, cost of goods sold, gross profit, salary expense, advertising expense, insurance expense and rent/lease expense. These accounts are adjusted by future assumptions to determine future income.
- 2). Make future assumptions on the changes expected to the accounts identified in Step 1. This step requires careful analysis to avoid the consequences from making wrong assumptions. Use national industry and economic data to determine what the future business climate will be like and how it will affect the business. For example, a rise or fall in interest rates, technological changes and consumer spending patterns can affect your business in a variety of ways. Analyze internal financial information and the local business climate to predict changes that may take place in the future. For example, some questions to consider: Do your employees need additional training, is your competition growing, and is your customer base expanding or contracting?
- 3). Calculate income and expense estimates based on the assumptions made in Step 2. The historical financial information from Step 1 is adjusted based on the assumptions from Step 2. For example, if you assume that interest rates will not rise in the next accounting period, you may take out a loan to increase your advertising expense by 10 percent to attract more customers, and the additional advertising is expected to increase sales by 5 percent.
- 4). Create a pro forma income statement using the income and expense estimates from Step 3. Organize all the estimated revenue and expense accounts from Step 3 and present them as a pro forma income statement to arrive at a projected net income amount.
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