Making Sense of Your Income Statement
Business owners are most interested to know whether or not their hard work are paying off - are they earning an income and achieving their goals?
Many small business owners would say they do this by just monitoring how much cash they have in the bank month on month. Monitoring cash in the bank is a very simple way of managing the business but there’s more things to look at than just a bank balance.
Understandably, accounting reports aren’t the sexiest thing in the world, but they are a necessity.
One of the reports that we like to look at and encourage business owners to review is the Income Statement (or called the Profit and Loss Report). This report is in readily available in just a few clicks in your accounting software like our user-friendly favorite Xero! Reliable reports generated from accounting softwares are real-time and can be generated in seconds if your bookkeeping is caught up.
The Income Statement shows your business’ performance at a given period of time. It could be a month, a quarter, or a year. Our clients know that we fans of monthly statements so that we can make changes as we need to revenue or expenses. Plus, it really starts to show our growth and goals.
What are the characteristics of an Income Statement?
Revenue/Income - this is all the income from all sources. This includes regular sales, interest income, grants, etc. In Canada, generally, all revenue should be recognized in the period in which it was earned regardless of when it gets paid.
Cost of Goods Sold (COGS) - the expenses in order to make the sales. Similar to revenue, your COGS should be recognized in the period in which they are incurred regardless of when it gets paid.
Gross Profit - The profit after COGS are taken into consideration. What’s left is what is used on operating expenses
Operating Expenses - This is the laundry list of expenses in a business. Advertising, accounting, sub-contractors, payroll expenses, cell phone, internet, software subscriptions. These expenses are also recognized in the period incurred regardless of when it gets paid.
Net Profit - The total profit that you have in your business. This should be a positive number - that means you’re profitable. If it’s a negative number, it means you had more expenses that revenue/income.
What are some of my favorite tips for this report?
Well-managed expenses
Always avoid unnecessary expenses. We are talking about surcharges, late payments/filing, penalties, and interests. Having these in your income statement means you are not in control of your business or you’re just forgetful on paying things.
Use of technology to be efficient in terms of process, time, and cost. I’m a advocate to using as few softwares as possible for our work. We want to find softwares that do multiple things at once. For example; I run my business on GSuite. That includes using Google Calendar, Google Docs, Google Sheets, Google Meets. I don’t pay for Zoom because I already pay for Google Meets. One software that I feel is a waste of money is Microsoft Suite but when you work with numbers you’re kind of forced into using - and paying for - Excel.
Revenue stability
I’m known for being a bit of a party-pooper on expenses, but I also like to look at revenue and see what areas that your revenue is stable or growing. It could be that a certain area of revenue has recently got popular. I like to look and see why that is - is there a time of year that triggered this? What about global or economic reasons? Find what works and focus on it. If you’re a marketing agency and let’s say people are asking more and more about SEO help and paying for it, you would want to start expanding that service. If that means hiring more employees or a specialist, take that into consideration.
In the meantime, I encourage you to go through all your expenses to find anything you’re wasting money on. I’m sure it’ll surprise you how many things you might have signed up for that you don’t use or don’t need to spend on.