Financial Factors

Financial Factors

The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It is a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result -- which is either a profit or a loss.

For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It is formed by listing your financial projections in the following manner:

1. Income -- Includes all the income generated by the business and its sources.

2. Cost of goods -- Includes all the costs related to the sale of products in inventory.

3. Gross profit margin -- The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.

4. Operating expenses -- Includes all overhead and labor expenses associated with the operations of the business.

5. Total expenses -- The sum of all overhead and labor expenses required to operate the business.

6. Net profit -- The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.

7. Depreciation-- Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.

8. Net profit before interest -- The difference between net profit and depreciation.

9. Interest -- Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.

10. Net profit before taxes -- The difference between net profit before interest and interest.

11. Taxes -- Includes all taxes on the business.

12. Profit after taxes -- The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.

Following the income statement is a short note analyzing the statement.