One integral part of running a business is to understand your income and expenses. The financial report that provides this crucial data is called the Income Statement also known as Profit and Loss (P&L) Statement. Understanding this report allows the business owner to know where the company stands financially. This will help you analyze the company and decide on business strategies, goals, and future opportunities.
The Income Statement summarizes a company’s revenue and expenses over a period of time. It allows you to see the financial story of the company’s activities in a monthly, quarterly, or annual basis. The foundation of this report subtracts the total expenses from the total revenue which results in either a profit or loss for the company. This helps the business owner decide whether it is best to increase revenue and /or decrease expenses to generate more profit.
Below is a sample income statement and a description of the basic components of the income statement.
Revenue is the total amount of income that your company makes. Includes income from product sales and/or services rendered.
There are two categories for expenses: Direct Cost and Indirect Cost.
Direct expenses are costs that can be traced back to the sales or services rendered which is called the Cost of Goods Sold. Direct expenses increase in direct proportion to the sales made.
Gross Profit results from the difference between the Revenue and the Cost of Goods Sold.
Indirect expenses are the cost of running a business that cannot be traced back to products or services provided. This expense includes but is not limited to utilities, supplies, rent, salaries, administration, marketing, depreciation, etc. They may be fixed or maybe a variable cost that will correlate to the company’s revenue.
Operating Incomes is the total revenue left after subtracting the expenses (direct and indirect costs). This shows the amount of money your business makes from its operational activities.
Other Income & Expense
This section of the Incomes Statements reports income and expenses that are not generated by the company’s operational activities such as interest, dividends, miscellaneous sales, etc.
Income before Tax
The income before tax is calculated by subtracting Other Income & Expenses from the total Operating Income.
Net Income is what you are left over with after deducting the tax expense. It is the result of deducting all expenses from the total revenue.
For new business owners, it is crucial not only to understand but also be able to analyze the Income Statement and all other financial reports. With this report, you can compare periods to help identify the strengths and weaknesses of the company. Are your sales shrinking? Is the cost rising? Are there too many discounts and returns? Can you cut down on indirect expenses? These are the questions every business owner should be asking. Understanding your company’s financial health will tell what your business needs to be successful.
CBK Pros can help you organize your financial data and guide you in analyzing your financial reports. Together we can determine which strategies would work best towards your business growth. Contact us for more information.