We’ve reached the final part of this 3-part series on the financial statements! It’s finally time for everyone’s favorite financial report, the Income Statement. Some people will know this as the statement of Profit and Loss, but those are just different names for the same report.
This report does exactly what it sounds like, it shows a business their profitable for a specific period. All businesses, even nonprofits, need to be profitable in order to keep the lights on. The profit from a product or service is necessary to pay expenses and expand the business, so the report showing profitability can be used as a key indicator of a healthy business.
The Income Statement has just 2 main sections:
Revenue- money earned
Expenses- money spent
Revenue
The major component of the revenue section is the money that the business earns from its main business activities, generally the sale of a product or service. Revenue can also be known as sales on some statements, but the meaning is the same.
This section can also include any other income earned from interest, royalties, or other fees. This is referred to as non-operating income. Income or revenue that is earned, but not through the main operations of the business.
For example, the sale of cookies through Linda’s Bakeshop would be considered operating revenue. If Linda also leased out a portion of her shop to another person, the revenue would be considered non-operating revenue as the main purpose of Linda’s Bakeshop is not property rental.
Expenses
Expenses are any necessary cost incurred during the course of normal business. Most business expenses are tax deductible so it is very important to accurately track every cent that is spent through the business to achieve the highest deduction possible.
The expense section may also be broken down into operating and non-operating expenses. The definition is the same as from the revenue section.
Operating expenses are the expenses from the normal operations of the business
Non-operating expenses are any other expenses unrelated to the core business
Overview
The income statement is the expanded view of a very simple formula:
Revenue - Expenses = Net Income/loss
As you might expect, you want to see a positive number once you subtract the expenses from the revenue. A negative total would be considered a net loss. Too many months with a net loss is concerning as the company is not as profitable as it should be and may be in danger of going out of business.
Producing an income statement every month also provides the business owner with a terrific opportunity to review the expenses of the business. Are you paying for any unnecessary or duplicated expenses? Are there any ongoing expenses that are not being accounted for in your budget?
The Income Statement, the Statement of Cash Flows, and the Balance Sheet are the 3 main financial statements that every business should be creating on a monthly basis. Each provides an important piece of the total picture showing the financial health of your business.
Any one statement without the others is providing incomplete data that may cause you to make decisions based on a faulty or incorrect assumption. All three together is where the magic happens.
Do you need help creating or understanding your financial statements? I can help! Contact me for a free consultation to see if you can benefit from the expertise of a profit coach.