Projected net income is the amount of income expected to be earned by a business in a future accounting period. Financial managers planning next year's business budget calculate projected net income by subtracting total costs of business operations, including interest and taxes, from the amount of sales revenue they expect to collect, based on their forecast for total sales. This future projection of net income allows financial managers to anticipate how much money they will need to allocate to business operations to achieve a desired level of production that is sufficient to meet their expected-sales forecast.
Determine projected sales revenue. This is the amount of money a business expects to receive from future business operations. Forecasting future sales can be as simple as trying to achieve management's long-term sales growth goals or involve more complex statistical analysis. For example, the executive of a company may set as a goal to increase sales by 5 per cent for the next five years regardless of the company's past performance. In this case, financial managers would increase the current revenues received by 5 per cent to arrive at the projected revenues.
Financial managers could also use statistics such as the average rate of sales growth revenue for the past decade. If the company has been growing sales revenue by 6 per cent per year over the past 10 years, a financial planner could increase this year's revenue sales by 6 per cent to arrive at next year's projected sales revenue.
Determine projected expenses. Financial managers can determine projected expenses from their figure for projected sales revenue. For example, if the company forecast £0.6 million in sales, financial planners could then estimate the amount of materials and supplies they would need to meet this level of demand for their product.
Some of the costs associated with achieving a certain level of sales could be known in advance, such as depreciation, taxes, interest on loans, lease payments or rent payments. Other variable costs, such as for direct materials, can vary over different production cycles. These costs could be estimated by financial managers by creating a price range for these materials based on what they believe they can reasonably expect to pay in the future.
Calculate the projected net income by subtracting projected expenses from projected sales revenues. Do not include in this calculation any sales or costs that can be attributed to a future period that is not directly related to the accounting period for which you are trying to project net income.
For example, a business may plan to increase sales by more than 25 per cent over the course of five years. A financial manager trying to calculate next year's projected net income would not want to assume that next year's revenue will increase by 25 per cent but instead could chose to project revenue sales growth of 5 per cent for each year for the next five years.
Projecting net income is subjective. Be flexible and realistic when making your assumptions.
Tips and warnings
- Projecting net income is subjective. Be flexible and realistic when making your assumptions.