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How to Read a Small Business Income Statement

The Income Statement, also called Profit and Loss Statement, is another report included within the Financial incomestatementStatement. Last month we discussed the Balance Sheet, which reports a running net worth of your business by breaking out assets, liabilities and owner’s equity or net worth. The Income Statement is different, in that it reports within specific time periods, such as monthly, quarterly or annually. This document is necessary to determine tax liability, or more importantly to reflect whether the owner’s equity is changing for better or worse. It also lets a business owner know how their financial decisions are impacting their overall success.

This financial statement has areas that appear to be quite straightforward but others are a little more daunting at first glance. Having everything accounted for accurately is one thing but what does it all mean? This post breaks it down for the small business owner so that you can easily read a small business income statement.

Revenue

Revenue contains all the income earned from sales of goods and services. This line item is listed as the top item on the Income Statement from which all charges, costs, and expenses are deducted to determine a net ordinary income. Other income items, such as gain on sale of fixed assets or transactions not involved in daily operations will be discussed later in this section.

Cost of Goods Sold

COGS are expenses that are required and used to generate income. Cost of Goods Sold (COGS) is determined by taking the beginning inventory + purchases + ending inventory, the difference is inventory used to produce goods sold. A good example is, if you were to sell a pair of jeans for $80, you would indicate that amount in revenue. Then you would list what the jeans cost you to purchase or manufacture in the COGS column. Let’s say that the jeans cost your company $20 in materials and time; $20 would be placed in this column for each pair of jeans sold to reflect their cost. If your company provides a service and not a product, this figure would reflect the total number of man-hours used to perform the service

Gross Profit, also called gross margin is the amount and percentage from revenue minus cost of goods sold. Gross Profit is important because it indicates how efficiently the business owner and management uses labor and supplies in the production process. It’s a very good indication of how profitable a company is at its most basic level. Companies with higher gross profit will have more money left over to spend on overhead expenses, operations and other business matters such as research and development.

Operating Expenses also referred to as Overhead Expenses incur during the routine carrying out of day-to-day business. These expenses, to mention just a few include business insurance, rent, office supplies, office payroll, workers compensation, annual licenses and permits, travel and other general expenses.

Net Ordinary Profit

EBIT (Earnings before Interest and Taxes) is the sum or Gross Profit less Operating Expenses. Net Ordinary Profit is the results of a company’s primary business operations. Not to get too deep into tax matters, but ordinary profit is taxed differently than other types of income.

Other Income/Expenses

Other Income/Expenses is the last section of an income statement and reflects extraordinary income and expenses. For example, Gain or Loss on Sale of Fixed Asset, interest or dividends earned. Rental income is another example, if you have a spare office you decide to lease and it’s not your primary source of income. In summary, any activity that is not part of your primary business and is taxed differently than ordinary income, such as capital gains taxes.

Net Profit

Net Profit (Loss) is your bottom line! Since our focus is small business owners, the subject of income taxes is not included in an income statement. If you are a sole-proprietor, LLC, Partnership or S-Corporation, your business will not pay taxes. Rather, the taxable income will flow over to your personal tax return. For this reason, tax refunds and estimated tax payments have not been discussed.

Read Your Small Business Income Statement

Income statements are the key to understanding the health of your company. If you’re looking for someone to help you get your financial systems and processes in order to further improve the health of your business, give me a call today.

How to Lose an Entire Day’s Worth of Revenue

You wear many hats as a small business owner that it’s sometimes impossible to keep up with everything that you need to get done. Unfortunately, some things slip through the cracks and can be detrimental to your business causing you to lose an entire day’s worth of revenue.Revenue

Last Friday, my hairstylist was forced to close her business because she forgot to renew her permit. She was so busy working in her business that she forgot to work on her business. So, last Friday she cancelled all of her appointments and spent the day waiting in line to renew her permit. Not only did she lose revenue for that day, but she also lost repeat and referral business due to the inconvenience she caused her clients.

As a smart business owner you know how important it is to delegate. A little preparation can save you from overlooking important aspects of your business, which can cost you money. Here are a few steps to get you in the right direction.

Choose which Tasks to Delegate

You should examine the tasks that only you can do and those that you can delegate. The obvious choices for tasks you should delegate include those that you don’t have the skill for and tasks that you hate doing. For example, if you have no personal interest in expanding the online aspects of your business such as social media, SEO and the like, then find someone who can do those tasks. If you’re not experienced in financial accounting strategies, hire someone who can assist you in maximizing your resources.

Pick the Best Person for the Job

Delegate responsibilities to the best person that you can find and afford. Be sure to observe their characteristics and choose the person who delivers results, not the one that acts busy. The person that you choose should be able to perform the tasks more efficiently and with more focus than you. When you surround yourself with people who can perform tasks exceptionally you’ll find that your business improves overall.

Provide Instructions

Think back to when you first started and the guidance that you got or wish you had, then relay that to the person that you’ve hired. It’s important that you are clear and concise without being overbearing or insulting. Keep instructions brief and to the point, and allow room for improvements. Clear communication is key.

Set Realistic Completion Dates

Establish milestones and deadlines for the tasks that you delegate. You’ll want to have a way to check on progress. You’ll also want to be kept informed on a regular basis and if any issue should arise. Have an open door policy or be easily accessible should a problem arise. The earlier a potential problem can be identified, the easier it will be to solve.

Be Thankful

Be sure to provide both verbal and written thanks for those who have accomplished their tasks on time and to your satisfaction. This will inspire confidence, loyalty and encourage high performance. It can also become the basis for your performance reviews and mentoring.

With proper delegation to those that you trust, you’ll build a stronger, healthier work environment where your business improves over time. By hiring the right people, you can delegate with confidence and focus on the things you enjoy most.

What other things can you delegate to ensure that you never lose an entire day’s worth of revenue over something that can easily be delegated?