Budgeting to Produce the Income Statement and Balance Sheet - dummies

Budgeting to Produce the Income Statement and Balance Sheet

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

A final step in the budgeting process is to create a budgeted balance sheet and budgeted income statement. Your balance sheet and income statement, whether budgeted or actual, are the two great financials. They reflect the bottom line, showing how the business is doing.

The well-balanced balance sheet

Your balance sheet is a fine indicator of business health. The table shows a healthy balance sheet.

Budgeted Balance Sheet
Assets $100,000
Less liabilities $50,000
Equals equity $50,000

As you review your balance sheet budget, keep in mind the goal is to maintain enough assets to run your business, which includes production (if you make things), buying inventory (if you’re a retailer), or employing people (for manufacturing, retailing, or service businesses).

The balance sheet should include assets needed for selling and distributing your products. Managing your business generates liabilities, too (accounts payable, long-term debt, and so forth). That’s okay, as long as you have a plan to pay them.

If revenue doesn’t supply you enough of the best asset — cash — you need a plan to raise capital. Capital represents an investment in your business. If a business owner invests $20,000 into his business, the $20,000 is considered capital for the business. That means you’re probably either issuing debt (taking out a loan) or selling equity (shares of the company) to stockholders.

The incredible income statement

Most business owners are most interested in the income statement. The owner typically plans this budget document first.

The table shows a budgeted income statement that projects a healthy net income.

Budgeted Income Statement
Revenue $50,000
Less expenses $25,000
Equals net income $25,000

Here’s the thought process: You figure out how much revenue the company can generate. Then you subtract likely expenses from the revenue, and the result is your net income. After that, think about how cash will “move” (the cash flow statement) and where your company will get sufficient assets to operate (the balance sheet).

As you move forward in managing your business, don’t be surprised if cash flow becomes the most important budget item for you. Without enough cash flow, not much happens.