Your income statement is one of the most important documents you can use to tell whether or not your business is successful. However, knowing what all the lines and subtotals stand for is more difficult than you think. I have put together some descriptions and examples to help you more fully understand your Income Statement. Those subtotals mean your business is either successful or not.
The Gross Profit amount represents the difference when you subtract cost of goods sold from sales revenues. This fundamental number represents the profit (or the loss) a business makes. That is after deducting the costs directly incurred to produce and sell their product or provide the service. It also represents the resources the company should use to cover all other expenses. Are you wondering why? Because other expenses are rent, utilities, insurance and so on. If you cover them with a non-recurring revenue this year, you probably won’t be able to cover them next year.
The Operating Income number represents the difference between Gross Profit and Operating expenses. This includes the costs not directly tied to making a product or performing a service. These are known as administrative expenses, marketing, rent, utilities, and depreciation. This is the result of the primary revenue-generating activities of the company. In other words, this number tells you if you are making money from the ordinary activities of your business. Set your goal to increase this number because this is the measure of your efficiency. It’s also a key performance measure to understand if your business will be able to grow and survive. In some cases, you could have an operating loss. Operating losses occur when the business is new. Similarly, loss may occur when you launch a new product or when you restructure your company. A loss in these cases is perfectly normal. As a result, it is crucial that you know why you have this loss and how you will solve it.
Income Before Taxes
The profit you realized after deducting all expenses may be found on the Income Before Taxes line. This number differs from operating income because it includes interests, gain or loss in investments, and nonrecurring items. These expenses do not represent the normal activity of your business and could be very different next year. You made a good deal selling that machinery you didn’t use. However, next year you won’t have another machine to sell unless you liquidate your company.
This is the bottom line of your company. It represents the difference between “Income Before Taxes” and “Taxes”. Consequently, this is the only thing you can’t do anything about because taxes must be paid!
Unfortunately, you need to know more. What you learned so far is not enough unless you compare your results to what you did last year, or last quarter, or last month. In this way, you will be able to check if your business is growing. In addition, this activity helps you identify your financial trend and measure performance over time. For example, if you have multiple activities, the comparison with previous accounting periods shows you which one is most profitable. Also, comparing expenses between different periods shows you whether or not a particular expense is growing too much. It, therefore, gives you the opportunity to analyze the reason and solve the issue.
Similarly, I offer one more recommendation. Take a look at your competitors and at the industry data. We live in a global environment. Benchmarking your performance against your competitor helps you benefit from their weaknesses, set goals, and predict whether or not your business survives.
Certainly there is much more to say. But these suggestions help you see your “numbers” in a less intimidating way. As entrepreneurs, we know how difficult running a business is. The good news is: If you know your business, you’ll be able to face issues and achieve the success you deserve.
Owner - Succentrix Business Advisors
In 2016, Gloria and her husband moved to Wichita Falls,TX with the air force. Gloria opened her office of Succentrix Business Advisors in order to continue the pursuit of her dream of serving entrepreneurs and independent business owners. Gloria is comfortable with anyone and everyone she meets. Globally, corporations and individuals alike are interested in cost controls, methodology and reporting implementation. Math is a universal language. If you and your small business want to improve what you are currently doing or if you want to take what you are doing to the next level, Gloria is the business advisor you seek.
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