Summary: How to interpret your Income Statement so you can reduce expenses and increase profit. Plus get a free 30 minute Income Statement Analysis by our experts who will advise you. Includes income statement example.
How 2 INTERPRET your FINANCIALS – (2 OF 3) THE INCOME STATEMENT
Whether you are an investor or running your own business you need to understand your financial statements, they are the keys to the company! They can warn of potential problems, and when used correctly, help determine what a business is really “worth”.
In this three part series, we will show you that anyone can learn how to read the BIG THREE: The Balance Sheet, the Income Statement, and the Cash Flow Statement.
We covered a balance sheet previously.
Although some parts of your income statement may seem obvious, the rest may appear to be Greek to you.
Step 1: UNDERSTAND THE COMPONENTS
The heading will identify the business, the statement name, and the time period covered by the statement.
The body of the statement will start with your top line, i.e. sales revenue and end with your bottom line, i.e. the nett income, which should generally be double underlined.
Step 2: DELVING DEEPER
*Note a minus sign is not always used, (_) indicates the same.
Nett income is your profit and the terms are interchangeable.
To understand who the sales are calculated and to track the different types of sales made, to which customers or how the numbers have changed over the period, you would need to obtain a sales report arrange by customer or by period.
The sales revenue less the cost of the goods of the goods sold (COGS) equals the gross margin (also called gross profit). COGS would include supplies purchased to produce the product, subcontractors used for that specific production or service as well as many other. When in doubt, if an expense is linked to a specific client it is a COGS and not an overhead or business expense.
Operating or overhead expenses are then lumped together. These would include payroll expenses, insurance, rental, telephones, advertising etcetera and would generally fluctuate very little month to month. These exist whether you are making sales or not.
Other income may appear under a separate income heading. This would include sale of assets, insurance refunds and interest earned. Investment Income is never to be included in sales revenue.
Income tax is also to be deducted before the nett income can be calculated. It is to be noted that payroll taxes are to be added to the employee’s payroll and will appear under selling, general and admin expenses.