The Income Statement is probably the most standard of all financial statements. It comes with standard math too.

Sales – Cost of Sales = Gross Margin.

Gross Margin
I didn’t talk much about gross margins when we discussed the sales forecast and the cost of sales, but the gross margin is a useful basis for comparison. Generally, industries have some kind of standard gross margin. Retail sporting goods do about 34 percent on average, and grocery stores about 20 percent. You own results will always be different from the standard, so just understand why you’re different, and don’t worry about it too much.

Gross Margin – Operating Expenses = EBIT

EBIT is also called gross profit in some circles, but that same term is sometimes applied to the gross margin, so I like EBIT better.

EBIT – Interest – Taxes = Net Profit.

The numbers are usually presented in that order. For financial statements the presentation can become very complex, as various items get broken down into rows and rows of detail, but for planning purposes, you want to keep it simple if you can.

The following illustration shows a simple income statement. This example doesn’t divide operating expenses into categories. The format and math starts with sales at the top.

Standard Income Statement
This is a partial graphic, showing only three months of a 12-month table.

I hope you notice that you’ve already gathered most of this data as part of your flesh and bones of the plan. You’ve already done the sales forecast, cost of sales, payroll, and expenses. If you’ve followed the standard financial definitions, as I hope you did (otherwise I’ll have to say I told you so), then creating the income statement is a matter of pulling the information together into a single table. Then add estimates of interest expense, and taxes.

Keep you assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments, just average your interest over the projected debt. Don’t try to do graduated tax rates; just use an average tax percentage for a profitable company.

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.