An Income Statement is a very important resource for the small business owner. You should prepare and analyze your every month. If you’re unfamiliar with this tool, read on.
What is an Income Statement?
An Income Statement is a financial report that lists all the revenue (Sales and other income) and expenses for your small business for a stated period of time. This time period could be a month, or a year, or several years. You may also hear the term ‘Profit & Loss Statement’ or “P&L” for short. This is referring to the same report.
It may seem intimidating to look at a corporate Income Statement showing several years worth of financial data, but luckily most small businesses require only a modest statement of earnings and expenses, culminating in a bottom line figure of net profit or loss for the time period.
Income or Profit??
These two words sometimes seem to be used interchangeably, and this can be confusing, but I’ll try to make it simple.
INCOME means revenue, which means sales dollars.
NET INCOME means profit. The “NET” means after subtracting expenses.
PROFIT means a positive figure left after you subtract your expenses from your income. It means you made something on your investment of time and money put into your small business, as opposed to a LOSS, which means your expenses are greater than your income. That’s not a good thing.
Let’s look at a couple very simple examples.
Here’s the first simple example:
This is an Income Statement for an attorney. Take a good look at it.
Revenue is listed first. She only has one stream of income, her legal fees. If you have more than one stream of income, such as lawn mowing and tree removal, or food and liquor, you would list each income stream on its own line on your Income Statement.
Expenses are listed next. You see the usual small business expenses here, rent, salaries, phone, etc. These are totaled and subtracted from Total Revenue.
The result of the calculation is a Profit, or Net Income. Had expenses been more than income, this would be a loss.
Look a little deeper, and we can see more about this business.
If there were any strange expenses, we would see it here. If she had been sued, for example, we’d see a large figure for legal fees expense. Also, note that her profit is about 50% of her income. That’s awesome!
Now let’s look at another example.
This Statement is for a dry cleaners. Note again that revenue is listed first, then the expenses. This small business is earning a Profit too, but notice it’s smaller. There is a smaller profit margin for this industry.
WHAT IS PROFIT MARGIN?
Profit Margin is the Net Income (aka Profit) divided by Total Revenue, in this case it’s $15515/$51690 or 30%. Remember in the other example it was about 50%.
Also note the depreciation expense. This alerts you to the fact that they own their building and cleaning equipment.
These statements are very quickly computed for you if you’re using Quickbooks or another small business computer software program.
They are also fairly easy to prepare if you have, let’s say, a month of deposit slips and check stubs.
Add your income together from the deposit slips. Then separate the information from your check stubs by expense, and list your expenses out and total them up. You should have a list of, say, rent, utilities, phone, insurance, supplies, etc. Then just subtract the Total Expenses from your Income, and there you have a Profit or Loss figure for that month.
If you’d like to learn more about preparing an income statement without using accounting software, check out my manual accounting system ebook. It’s free.