What is an income statement? The document that tracks a business’s revenue and expenses during a set period.
An income statement is the first place a potential investor will look. It provides a snapshot of your business’s financial performance and ability to generate profit.
It’s also known as a profit & loss statement because that’s the key information it displays: Did you gain or lose money? How much? An income statement has the answers.
An income statement is different from a cash flow statement.
The income statement presents a company’s revenues and expenses and non-cash items like depreciation and is used to determine profitability. The cash flow statement focuses on the actual movement of cash.
An income statement has four key elements.
Together, these four sections give you a business’s net income:
- Revenue
- Expenses
- Gains
- Losses
Revenue refers to the amount of money a business earns.
Revenue is the money generated from normal business operations. It’s the top-line figure from which costs are subtracted to determine net income.
Expenses refer to the money a business spends during a specific reporting period.
There are primary activity expenses, which are the expenses directly related to the main activity of your business, and secondary activity expenses, which are associated with non-core business activities, such as interest paid on borrowed money.
Gains are money made from activities outside normal business operations.
The net income you get from selling old equipment that you’re not using anymore would be considered a gain.
Losses are a reduction in value that’s not related to earning revenue.
A loss is the flip side of a gain, when a business incurs a financial loss from non-operational activities.
Every income statement can look different.
The four categories (revenue, expenses, gains, and losses) can be further divided into individual line items, depending on the business. Revenue may be split by product line, and expenses can be broken down into subcategories like wages and rent.
But no matter how it’s divided, each income statement will have the same basic information.
An accurate income statement gives you a picture of business performance.
To thoroughly understand your business, it’s essential to have an up-to-date, complete income statement.
Know your net profit.
The net profit (or loss) is what most people focus on, and for good reason. It’s the final figure after all expenses, taxes, and interest have been deducted from revenue. Net profit is the true measure of a company’s profitability.
An income statement gives you a sense of your business’s efficiency.
A few figures in the income statement help you understand if there are areas where you’re wasting money.
Look at operating expenses, and you may find areas where spending has increased without a corresponding increase in output. Consider cutting costs there or allocating resources differently.
Gross profit, calculated by subtracting the cost of goods sold from revenue, also tells you how efficiently your company is selling its products. A strong gross profit margin is an indicator of operational efficiency and overall financial health.
Get business insights from your financials with an on-demand CFO.
If you look at your income statements and see a maze of numbers, think about connecting with an on-demand CFO. They can not only help you understand the fundamentals of your business’s finances; they also know how to read between the lines.
An on-demand CFO sees the big picture.
Here’s an example: If operating expenses are rising faster than revenue, you may need a closer look at how funds are being allocated. A steady increase in revenue often signals business growth, while a decline can be a warning sign.
Net profit is the true measure of a company’s profitability, but it’s important to look not only at the final number.
What led to your profit? If it were higher sales, you would want to look at the channels that drove growth and see whether those trends are sustainable. If it was a temporary spike, try to find a way to repeat that success.
Some of these opportunities are beyond a business owner’s capacity.
An on-demand CFO offers an outsider’s perspective, finding expenses that can be trimmed and other areas where you can improve. They can help you think long-term, leaving you time to focus on day-to-day operations.
Contact me for help with your small business.
We have a proven track record of delivering on-demand CFO and accounting services to small businesses who want to operate lean and grow smart.
Schedule a discovery call today.
Talk soon,
Jeremy A. Johnson, CPA