How to Read an Income Statement • Troy Media

0

The owner of a $100 million company recently told me he wasn’t sure he understood his financials. How could someone build a successful business in less than five years without understanding how to read a financial statement?

Because he’s good at hiring great people, including his chief financial officer (CFO), and has other skills, he hasn’t spent the time or learned to read his statements.

Many business leaders feel overwhelmed when reading financial statements. They shouldn’t be. Here’s what to look for on your income statement to help you feel more confident.

Understand what an income statement is

Income statements are sometimes called profit and loss accounts for a good reason. They tell you how your business is doing over a period.

Ask for comparative statements: Always ask your accountant for comparative statements. Looking at just one income statement can be misleading. A comparative statement means that you have two income statements on one page: this year’s and last year’s. The periods should be the same so you can compare apples to apples.

You’ll also want to look at your year-to-date income statement, which will help you understand how you’re doing over a longer period. Again, ask for a comparative statement so you can see how you’re doing compared to last year.

The income statements are divided into three sections

The first section is the income statement, which shows where your income comes from. It could be broken down into departments or divisions to let you see where the money is coming from. It also shows the cost of your goods and the gross profit you made. Gross profit is the money you have before your expenses.

  • Revenue: You want to examine them and ask yourself: are sales increasing or decreasing? What percentage? Are some departments growing or shrinking compared to the previous period? Why does this happen? What are the industry trends? Do you do anything different that helps or hurts sales? Why do some areas outperform others? The more you understand this, the better your chances of success will be.
  • Cost of Goods Sold: Look at each line of your income statement. What has changed compared to the previous period? Can you explain the changes? Is there an input cost you can reduce? Has the cost of goods increased or decreased?
  • Gross profit: Look at the gross margin percentage compared to the previous period. Has it increased or decreased? If gross profit has decreased, you may need to make changes to ensure this does not continue. What needs to be done? If it goes up, good for you. Consider what you did to make this happen. Can you keep doing this?

The second section is for expenses, usually a list of different types of expenses. These can include rent, labor, administration, insurance, utilities, etc.

General and administrative expenses: Carefully compare this area line by line to the previous period. Are there expenses that have increased? Why have they increased? What must change? Are there areas where you can eliminate more costs? Remember that every unnecessary cost you can cut goes straight into your pocket as the owner.

Profit or loss: The last part of the income statement tells you whether you made or lost money. Compare your profit for this period to the previous period. Are you going in the right direction? Have you achieved your goal for your profit? Are you satisfied with this figure or discouraged? What needs to happen for you to achieve your goals?

Remember that you own the business to make a profit.

Don’t rely on bank balance

Many small business owners base their important decisions on what’s in the bank at any given time. That is problematic. Looking for trouble if you don’t know where you’re from, where you’re going, or how your business is doing. It’s like driving a car without a gas gauge or a sports team that only finds out at the end of the season whether it has won or lost games. You wouldn’t play sports or games without keeping score. Why play roulette with your company without counting points?

We need to get past the fear of looking at our financial statements. Once we know what we’re looking for and understand how we can make the changes we need, our monthly comparative financial statements should be something we look forward to reading.

Dave Fuller, MBA, is an award-winning business coach and partner of Head of Pivot Inc..

For maintenance requests, Click here.


The opinions expressed by our columnists and contributors are their own and do not inherently or expressly reflect the views of our publication.

© Troy Media
Troy Media is an editorial content provider for news outlets and its own hosted community media across Canada.

Share.

About Author

Comments are closed.