Comparison of an Income Statement to a Budget
Your company's accountant, controller or chief financial officer oversees the accounting and finance functions. If your company is small, this responsibility will be yours, or you can enlist the aid of a bookkeeper. In addition to generating and updating financial statements, including the income statement, the accounting function includes the preparation and maintenance of the budget. The income statement and the budget both play important roles.
A budget is a spreadsheet that details what your company intends to generate in revenues and expend in costs over the next quarter or year. It is typically broken down by month or quarter to provide the information necessary to make decisions and, later, any necessary adjustments. A budget is a forecast. You use past performance combined with expectations of future results and performance to create a budget. Once the year begins, you track your budget against actual revenues and expenses.
Your company's income statement tells you how much money your company generated and spent over a specified period, typically a month or year. It shows how well your company produced revenues and how efficiently it converted sales to profits. The income statement's top line shows sales, the middle shows expenses and the bottom line shows the net income or loss. Your income statement also shows profitability at several levels: gross, operating and net.
Budget vs. Income Statement
A budget is an important accounting and administrative planning tool because it helps you define and set company goals and measure the achievement of those goals. It also helps you identify the potential pitfalls of a business downturn or rapid growth and determine ways to avoid or reduce those pitfalls. Your company's income statement allows you to see how sales perform during different times of the year or when you use various marketing activities. It also lets you see trends that can help or harm your company.
Tracking and Analysis
Both the income statement and budget are financial analysis and tracking tools that, with regular use, help you build and maintain a financially strong company. Reviewing and monitoring both the income statement and budget can help you reduce expenditures and reallocate those resources to areas of the company that can best use them. Although your income statement is fixed and shows what is actually occurring in your business, your budget is a forecast that you can change. As you observe trends on the income statement, you can update the budget to address them. For example, if your company's personnel costs appear to be rising too fast, double-checking the budget will tell you if that rise was planned or not. If not, you can explore options to either reduce personnel costs or stop them from rising further.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.