A budget income statement, also known as the pro forma income statement, is a financial report that analyzes the estimated revenue and expense numbers with the real numbers. It is a report that puts the estimated numbers alongside the real numbers to evaluate the company’s performance.
Preparing a budgeted income statement is a fundamental step for a business to assess the effectiveness of the financial planning process. Companies also formulate a budgeted balance sheet together with the income statement to examine the plans that can be achieved financially. Furthermore, some companies make more than one estimation based upon different scenarios, which promotes understanding of the possible outcomes and, hence, make proper decisions.
A budgeted income statement report is as well applied in management to assess the efficiency of the departments and the company in general. As a rule, a company establishes budget and performance goals at the beginning of the year that are based on past performance and growth expectations.
Such a financial report is considered as beneficial for both the company and the investors and lenders. Current and potential company investors always aim at knowing the company’s financial position and how confident the company behaves when it comes to its performance in the financial period. Lenders, however, will not choose a company that avoids evaluating its income and future performance because they need to be assured of the company’s capacity to pay back the loan with interest.
The purpose of a budget income statement is that it provides a comparative performance to let a company understand its shortcomings and the places where they succeed. It is a fundamental approach that helps the lenders and potential investors to make the right choice concerning the investment in a company.
A budgeted income statement is extremely practical for monitoring whether the projected financial results of a company seem to be feasible and is most efficient when applied for all of the budget periods at once.