With a staggering 80% of businesses destined to fail with their first 18 months in operations, according to Bloomberg, and with a root cause most typically due to financial insolvency, the best advice any entrepreneur can ever take to heart is this: know your numbers! Sure, you can outsource some of the dirty work to a bookkeeper and/or an accountant. You might even hire a financial advisor. But, at the end of the day, it’s a must for every business owner out there to know how to read and analyze their numbers on a monthly basis (at minimum) in order to properly keep afloat and plan whether it’s necessary to zig or to zag when planning future business moves.
Alongside its good buddy, the P&L (Profit & Loss Statement), an Income Statement is one of the most important financial documents in business. It tracks income and expenses, and shows the profitability (or losses) of a company over a specific period of time.
In this article, we describe how to write a basic Income Statement step-by-step so that you may stay on top of your financials. While you may do this the old-fashioned way with paper and pen, it is recommended that you use some sort of spreadsheet software (Excel, Numbers, etc.) so that you have the option of using formulas to help automate some of the calculations for you.
1. Your Sales Figures
This column is generally referred to as "gross revenue" and it includes all of the sales figures from a particular period of time.
2. Cost of Goods Sold
In this column, usually referred to as "cost of goods sold," you would include all of the costs associated with manufacturing or buying the goods. For example, if you are a reseller, you would include the actual cost of the product you are selling as well as any costs directly associated with the sale, such as the cost of having the parts shipped to your warehouse. If you are a manufacturer of your own goods, you would include the costs directly associated with making the product.
3. Gross Profit
To determine your gross profit, you will need to deduct the ’cost of goods sold’ number from the ’gross revenue’ number.
4. Operating Expenses
You will need to add up all of the day-to-day costs associated with running your business in this next column, but not those directly associated with production of cost of goods, which have already been tallied in ’Cost of Goods Sold’. Operating expenses include things such as payroll, commissions, rent, repairs, office supplies, travel, and entertainment, which are sometimes referred to as non-manufacturing expenses.
5. Income From Operations
In this next column, typically referred to as "Income from Operations," you will deduct the ’operating expenses’ from your ’gross profit’ line.
6. Income Tax Expense
Although income taxes are typically filed on an annual basis, it’s a good idea to get with a tax accountant to help you estimate your income tax spend. You’ll want to estimate this on a monthly basis, and if your tax expense is high enough, the IRS will likely have you make quarterly payments.
7. Net Income
The net income is one of the most important numbers in the bottom line of any business. It tells you how profitable the business is after every single one of its expenses have been accounted for. If this number is a negative, it will show you how much money a business has lost in a particular period of time.
The number at the bottom line of an Income Statement is critical for knowing the overall health of a business. It can determine whether expansion is an opportunity or if cutbacks need to happen in order to keep the doors open. As you can see by the steps outlined in this article, these are fairly easy calculations to make (assuming a business has kept good receipts on sales and expenses). Staying on top of your numbers will help keep your business financials healthy and prevent your business from becoming another statistic.