Ed Koch, the outspoken former mayor of New York, reportedly walked the streets of the city asking, “How am I doing?” As a business owner, you want the same kind of insights for your enterprise: “How is my business doing?” The Income Statement shows Operating Income versus Revenue and it gives you the answers that you need.
What is an Income Statement?
An Income Statement (or P&L Statement) is one of three essential financial statements that are used to manage your business. The Income Statement simply identifies the revenues (money inflows) and expenses (money outflows) for a business and shows what is left—hopefully, profits!
Let’s Define the Terms
“Revenue” (generally thought of as “sales”) is the amount of money received by an enterprise for the goods or services it has sold. It is often referred-to as the “top line” figure. This will show where and when you are generating revenues.
“Operating Income” reflects a company’s profits after the expenses of running the business are subtracted. Looking at this category will indicate where you can cut costs.
The “bottom line” or final Net Income (or loss) factors in dividends, taxes and interest payments. This is the most important figure indicating (if it is positive) that you are truly profitable.
Why Track Operating Income Versus Revenue?
Without tracking key financial measures of progress, you won’t know what actions to take to improve business results. For example, “top line” growth indicates that revenues are increasing. Use this number to examine and manage trends to keep healthy revenue growth constant.
Examine and manage the expense components of your operation to achieve consistently positive and healthy Operating Income. Both categories, Operating Income versus Revenue, are essential to know how well your company is performing.
By using the same categories, along with consistent and timely measurement, you will have a clear picture of the health of your business.
An Income Statement Will Help You Three Ways
An income statement will help you make smarter, more informed decisions. Look back over time to see trends and to better forecast the future. Know when to spend and when to invest.
Provide some proof of the success of your business. This key document will show the health of your enterprise to others who may be interested, including bankers and investors. An income statement will also help prepare you to file taxes.
Four Key Steps To Take
- Keep accurate records and make sure the data is entered in a timely fashion.
- Define the time period for your record keeping and keep that timeframe consistent.
- Properly record all revenue.
- Accurately record all expenses with clear attribution.
Get Professional Assistance
Get expert financial assistance, rather than doing all the detailed work yourself. Estess CPAs, a leading CPA firm based out of New Orleans, LA, specializes in serving the needs of small businesses and provides experienced professional accounting, bookkeeping, tax planning and payroll services.