Are you unsure whether or not your business is making a profit? Let's take the example of Jevonte Williams, a 30-something business owner.
Let's say they own a dance studio in Downtown Detroit, Michigan. They cater to the LGBTQ+ community and other marginalized groups of society. Apart from providing a creative outlet, they stand for a social cause.
Fincent can help business owners Jevonte maintain their accounts properly and provide clarity about all items in the different financial statements. Their simple, affordable, and delightful services ensure hassle-free bookkeeping.
Fincent ensures that their accounts are maintained properly and that they have a clear picture of their business' profitability.
So how do you find out if your business is making a profit? The answer is simple; you check your income statement. Read on to find out what an income statement is and how it can help you.
This is an important financial statement that helps in understanding a company's financial performance in a given period. The company's revenues and expenses are recorded in the income statement. If your revenues are more than your expenses, you make a profit.
It forms one of the three vital financial statements of a company, the other two being the cash flow statement and the balance sheet. Total revenues include both your operating revenues (from the business) and non-operating revenues (not from operations).
Total expenses include primary expenses (relating to the production) and secondary expenses (administrative expenses).
Through an income statement, you can determine the efficiency of your operations, areas that need improvement, and how well you are doing compared to your competitors. An income statement example will clarify all your doubts.
Here is a sample income statement of Lopez Architectural Services, a hypothetical architectural firm, to give you a better understanding of what one looks like.
Lopez Architectural Services, Inc
For the year ended 31st March 2021
The income that you generate through the sale of goods or services in a financial year is the sales revenue. In an income statement, this is referred to as gross sales or 'top line' since it appears at the top of the income statement. Sales revenue should not be confused with 'profit' since it doesn't take the expenses into account.
All the costs associated with the production of your goods and services, including material and labor, form part of the cost of goods sold. Indirect expenses like the cost of sales and distribution are excluded.
Gross profit or gross margin is calculated by deducting the cost of goods sold from sales revenue. With gross profit, you can estimate the efficiency of labor in producing goods or services. With higher efficiency, the cost of goods sold will be lower and gross profit will be higher.
Unlike the cost of goods sold, general expenses are 'fixed costs' that don't vary with production. Also known as general and administrative expenses, you need to pay them even if you don't produce anything. They are essential for the smooth running of your business' operations.
For example, by law, your accounts need to be audited, and you need to pay the audit fee. Without advertising, it's difficult to promote your products.
Operating earnings are calculated as the difference between the gross profit and the general expenses. You can calculate the profitability of your business after accounting for all internal costs. Unlike external costs like interest on loans taken for your business from banks and other financial institutions, you have more control over internal costs.
Operating earnings are also referred to as operating income or operating profits.
When you take a loan from a bank or financial institution for your business, you need to repay it along with interest as per the contract. The bank or the lender is your creditor, and your income statement includes all interest payments for a particular year.
After deducting the interest income from the operating profit, you get earnings before the income tax is paid.
You have to pay income tax to the Federal Government and State Government on your earnings.
What is left after you have paid your taxes is your net profit. Since it is the last item on the income statement, it is known as the bottom line.
If you need an income statement format to help you identify the items that are included in it, here is a sample template for your reference:
Company Name Income Statement
Date Created: Date Issued:
Instead of calculating net income through multiple steps, you can calculate it in a single step. You can calculate the net profit straight away without calculating the gross profit, operating income, and earnings before income and taxes.
It is a simpler version of the income statement where all total expenses are deducted from your total revenues to arrive at the net profit.
Here is a sample single-step income statement of Lopez Architectural Services, a hypothetical architectural firm, to help you understand them better.
Lopez Architectural Services, Inc
For the year ended 31st March, 2021
While the single-step income statement is easier to understand, the multi-step income statement is needed for business purposes.
If you want to know what percentage each line item is of your sales revenue, you need a common size income statement.
Common size income statements help you identify business trends. For example, higher efficiency could lead to a fall in the cost of goods sold and an increase in gross profit by 15%.
While the income statement relates to a certain period, the balance sheet relates to a particular date. You know what you are worth (owners' equity) through the balance sheet, along with how much you own (your assets) and how much you owe (liabilities).
The income statement gives you an insight into your revenues and expenses over a particular period and whether you have made a profit or loss.
The income statement is a key element of your business' finances. However, it can often be a task to prepare and analyze. Fincent takes the task of bookkeeping off your plate with their industry-leading services. Get in touch with them to give yourself the space to grow your business while they take your business' bookkeeping off your plate.
Fincent: Your Business's Personal Financial Wizard - From Bookkeeping to Tax Filing