Income Statement:  How to Read this Important Document

By Tammy Swasey-Ballou | Dec 16, 2012

This is the second of three key financial statements that give you an overview of your business as it currently stands and informs every new decision you make for the future of your company:

AKA Profit and Loss Statement, the income statement gives you a breakdown of the total revenue your company brought in over a specified period of time and details the costs incurred during the same cycle of business to give a net income result at the end. During times of growth, the investment in new fixed assets, market share, and future sales may exceed revenues and be considered a worthy risk toward increased gains in the future. It’s important to really understand the breakdown of these numbers rather than focusing on the resulting net income to determine your company’s financial health and continuing strategy.

Net Income = Revenue – Expenses

Revenue can be sales, capital gains from investments, income from online advertising, or rental income.. and having an understanding of the primary source of revenue in your business will directly impact your time and energy investment into various lines of business –including proper allocation of overhead costs for bookkeeping.

Expenses are essential to doing business. All companies have a cost of doing business including cost of goods sold, labor cost, overhead costs such as supplies, utilities, memberships, and a marketing cost. Understanding the relationship between the cost of a service or product and the relative income generated from that item gives a deeper understanding your business, allowing for effective strategies for mitigating costs and increasing value overall.

example:

Revenues

Net Sales = $100
Rental Revenue = $50

Total = $150

Expenses

Cost of Goods = $50
Wages = $50

Total = $100

Net Income = $50

 

Comments (0)
If you wish to comment, please login.