Business income budget is a forecast of future income for a business. It is very important to an organization as the most business plans and directions are determined by how much future income it is going to make.
Income Budget can be segregated into a few smaller budgets such as:
1. Sales Budget
2. Cost of Sales Budget
3. Operating Budget
A sales budget is a forecast of future sales, often analyzed into both units and dollars. To ensure that the sales budget is realistic, the preparers need to prepare workings to justify the sales number reflected in the budget. For example, a Coffee Outlet forecasted coffee sales of $720,000 for the coming year. To ensure that the forecasted sales is realistic, the outlet need to justify how the $720,000 sales number is derived at. An example of the justification can be a projected sales of 200 cups of coffee per day x 30 days x 12 months which equal to $720,000. The sales budget can be used to create company sales goals.
A cost of sales budget is sometimes refer as purchase budget. It is a forecast of direct costs attributable to the sales. In the above example of Coffee Outlet, the direct cost is cost of the coffee beans required to produce the coffee drinks. For example, the cost of a cup of coffee drink is about 20% of the sales price. The calculation of the cost of sales budget would be $720,000 sales x 20% which is equal to $144,000.
An operating budget is a forecast of future cost needed to run a business. The operating cost would include staff salaries, premise rental, utility, stationery and other administrative expenses. Using the above example of the Coffee Outlet, the current operating cost of running the outlet is about $300,000 per year and it is expected to increase 15% in the coming year after taking inflation and staff salary increments. The calculation for the forecast operating cost would be $300,000 x 115% (100% + 15% increase) and equal to $345,000.
An income budget is the consolidated position of the above three budgets that are sales budget, cost of sales budget and operating budget. It shows the overall profit or loss generated by the business. In the case of the above Coffee Outlet example, assuming that the outlet only sells coffee, the income budget would be as follows:
Coffee Outlet
Budgeted Income Statement for the coming Year
Sales $720,000
less: Cost of sales $144,000
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Gross profit $576,000
less: Operating expenses $345.000
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Profit before tax $231,000
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