Boost Your Business Income by Mastering The Income Statement

Make smarter business decisions — and make more money — by decoding your income statement.

Key Takeaways

• An organization's revenue, costs, and profit during a given time period are tracked in income statements, which are essential financial records.

• It is essential for business owners to comprehend a basic formula in order to assess the financial health of their organization.

• It's critical for business owners to periodically examine and comprehend the various elements of their expenditures.

A home healthcare company was our very first consulting client. We requested to examine financial statements for our preliminary research, and the owner sent them to us in the form of a three-ring binder with monthly financials, that included an income statement, balance sheet, and cash-flow projections.

Every three-page statement had a clean three-hole punched and upper left corner staple, showing no signs of wrinkle from the staple and no sign that the owner had even turned to the second page.

We quickly ascertained that the client did not utilize those funds to assist her in managing her company.

1. Income statements cover a period of time

The income statement shows the total amount of money that your company has made so far. The statement often shows performance over a quarter, a month, or a year.

You may see, for instance, "Y-T-D August," which denotes the week of January 1 through August 31. The crucial thing to remember is that income statements usually include a time period, and it's critical to identify that period.

2. Every income statement follows a simple formula

No matter how complicated, every revenue statement adheres to this very basic formula: Income - Outlays = Profit It is that easy, honestly. The income statement displays the revenue, expenses, and profit generated by the company for the period it covers.

3. Multiple names for one item cause complexity

People using multiple names for the same object might contribute to the complexity of income statements. Instead of "revenue," the terms "sales" or "income" could be used. "Costs" and "expenses" are also used synonymously. Some refer to "profit" as "net income."

Just keep your cool about the technical terms. Recall that whatever of the terminology you employ, the amount of money you receive less the amount you have paid out is the amount you keep.

4. Expenses are often split into multiple parts

The fact that profit is typically computed at interim levels and expenses are typically divided into component parts can also give the impression that an income statement is more complicated. For instance, you frequently observe:

• Revenue

• Cost of goods sold

• Gross margin

• Selling, general and administrative

• Profit

Expenses have been divided into two categories in this instance: selling, general, and administrative (SG&A) and cost of goods sold (COGS).

COGS are expenses that are directly linked to the goods or services you sell. For instance, COGS would comprise the materials you purchased to produce the widget you sold as well as the money you gave the widget maker. COGS typically fluctuate in direct proportion to revenue, which is determined by how many widgets are sold.

Even though they are required, SG&A expenses are unrelated to the quantity of widgets sold. For instance, the rent and energy costs for the office building, as well as the salaries of the president, CFO, and salespeople, are usually included in SG&A. These expenses usually don't change based on how many widgets are sold and are more consistent from month to month.

5. Gross margin percent should be relatively constant

Profit is computed at an intermediate level known as the gross margin after expenses are divided into two categories. Revenue less COGS is equivalent to gross margin. The money you make from selling goods or services less the cost of delivery is known as the gross margin, sometimes referred to as the gross profit. Finding the gross margin as a proportion of revenue is particularly helpful:

Gross Margin / Revenue 100 = Gross Margin Percentage

This is important as, as previously mentioned, COGS ought to increase in line with income. As a result, the gross margin % ought to remain mostly stable. A warning notice should be raised if there is a notable shift, such as going from 40% in one period to 20% in the next. Even while there may be entirely legitimate explanations for this kind of shift, it's crucial to comprehend what's happening.

6. Dollars spent on SG&A should be relatively constant

The money you are spending on SG&A is the last item to watch out for. Additionally, this figure ought to be quite steady. A notable shift in the amount of money you are spending on SG&A ought to raise suspicions and prompt you to investigate more to find out more about the state of your company.

Globe See Agency has the proven strategies to help your company take off! Get in touch today and see the results for yourself.