The income statement of any business is probably the most
important report of all. It is a
snapshot of the financial performance of your business over a period of time,
such as a month or year. You might also
hear it called the Profit and Loss Statement, or P&L.
The income statement can give you all kinds of insights as
to whether you are bringing in enough sales, if your prices are generating
enough profit, and how your expenses are running. Let's take a look at the report, step by step.
Revenue
The report starts by listing the revenue for the period of
time covered. Revenue includes all
sources of income, including sales from operations, interest and investment
income, revenue from insurance claims, sales from assets or other parts of the
business, and any other source of revenue. In most small businesses, sales will
be the largest part of the revenue, if not all of it. In some countries, the
term used for sales is turnover.
If you sell more than one item or have more than one location,
it might be a good idea to be able to view the sales detail from these
categories. This may or may not be on
your income statement depending on how formal it is, but you should be able to
get a drill down report on your sales detail.
Look for exceptions to what you expect to see. There can be some decisions you can make and
actions you can take from the insights you discover.
Cost of Goods Sold
This section of the income statement includes costs you
incur directly on items you sell. If you maintain an inventory, it's the cost
you paid for the inventory items that you sold during the period. If your
business is a manufacturer, cost of goods sold, or COGS, will include costs of
materials and labor to produce the items.
If you own a service business, COGS will typically be zero.
As a service business, you may incur direct costs when providing services, and
these costs can be booked in a variety of expense accounts, including
supplies.
Gross Profit
The expenses section of the income statement is the longest
part. It includes all of the expenses you incurred in your business, including
advertising and marketing, rent, telephone, and utilities, office supplies and
meeting expenses, travel, meals, and entertainment, payroll and payroll taxes,
and several more.
You might also hear the term overhead. Overhead is a subset
of expenses that have to be met whether you sell zero items or millions. They
include items like rent and utilities, management payroll, and office
supplies.
To review your expenses, check line by line to see if
anything looks out of sorts, and take the appropriate action.
Net Profit or Loss
The final number on your income statement represents whether
you made or lost money in the period the report covers. The formula is simple:
revenue less COGS less expenses equals net profit or loss.
Net profit/loss can go by many names, depending on the size
of your business and your accountant's vernacular. You may also see EBITDA:
Earnings before interest, taxes, depreciation, and amortization. Earnings is
another word for net profit.
Perspective
It's a good idea to compare your income statement numbers to
other periods in your business. Common comparisons include last period, last
several periods, and same period last year.
It's also a great idea to have a budget that sets goals for
your income statement numbers. Then you can compare budget to actual numbers
and take action on the variances.
If your business falls into a standard type of business, you
may also be able to see how it is doing compared to others in your
industry. This is called benchmarking,
and the income statement is a very common format that's used in
benchmarking.
Do spend some time each period reviewing your
business's income statement. It can help you make a faster course correction in
your business so you can be even more successful than you already are.