19: Understanding The Profitability Of Your Business Using Your Income Statement Or Profit & Loss R
19: Understanding The Profitability Of Your Business Using Your Income Statement Or Profit & Loss Report And How It Relates To Measuring Financial Performance, Whether You Are A Solopreneur, Entrepreneur, Small Business Owner, You Have A Virtual Online Bookkeeping Business Or Are A Virtual Assistant Or VA
Knowing how to read and analyze your Income Statement or Profit & Loss report is not only important, but it could be critical to the success of your small business. Understanding how your business is performing financially will prompt strategic decisions and meaningful operating goals for the future of your business. It will tell you if your business is profitable or not, and where you could work on cutting costs or, maybe you need to make a shift or pivot your business to turn your business from operating in the red – or showing a loss, to operating in the black – or showing a profit. It doesn’t matter if you are doing your bookkeeping with a manual bookkeeping system such as using a spreadsheet like Excel or Google Sheets to do your bookkeeping or a computerized software system like QuickBooks or QuickBooks Online, you will still be able to generate an Income Statement for your business. Whether you are a solopreneur, entrepreneur, small business owner, a bookkeeper with an online virtual bookkeeping business or a virtual assistant looking to add bookkeeping as a service to your existing business, listen in to today’s episode and I’ll make sure that the next time you are having a conversation about income statements, profit & loss reports or P&L’s with your colleagues you won’t feel intimidated, left out or confused. You will be able to speak with confidence knowing exactly what they are talking about and most importantly, you will know exactly how your own business is doing because you will be looking at your Income Statement with confidence knowing your numbers are correct…
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Show Notes:
Knowing how to read and analyze your Income Statement or Profit & Loss report is not only important, but it could be critical to the success of your small business. Understanding how your business is performing financially will prompt strategic decisions and meaningful operating goals for the future of your business. It will tell you if your business is profitable or not, and where you could work on cutting costs or, maybe you need to make a shift or pivot your business to turn your business from operating in the red – or showing a loss, to operating in the black – or showing a profit. It doesn’t matter if you are doing your bookkeeping with a manual bookkeeping system such as using a spreadsheet like Excel or Google Sheets to do your bookkeeping or a computerized software system like QuickBooks or QuickBooks Online, you will still be able to generate an Income Statement for your business. Whether you are a solopreneur, entrepreneur, small business owner, a bookkeeper with an online virtual bookkeeping business or a virtual assistant looking to add bookkeeping as a service to your existing business, listen in to today’s episode and I’ll make sure that the next time you are having a conversation about income statements, profit & loss reports or P&L’s with your colleagues you won’t feel intimidated, left out or confused. You will be able to speak with confidence knowing exactly what they are talking about and most importantly, you will know exactly how your own business is doing because you will be looking at your Income Statement with confidence knowing your numbers are correct…
Welcome Back…When you want to know how profitable your business is…or how much net income or loss your business has made for a certain period of time, you want to look at your Income Statement. It is also called your Profit & Loss report or even your P&L. Your Income Statement takes into consideration all of your income and expense transactions and summarizes them by account. It shows your revenue (sales) minus your expenses giving you a net income or net loss for that specific period of time. The most popular periods of time would be either quarterly or annually.
So, let’s dive into what an Income Statement tells you and we are going to start at the top. Your Income Statement will show all of your revenues or sales at the top of the report. These could be listed in one generic account such as sales, or you could have each of your income producing streams listed as a separate revenue account and summarized as your total revenue.
Next, you will see your Cost Of Goods Sold or sometimes referenced as “COGS” or COGS. These are all the costs directly related to producing the goods or services you sell in your business. Cost of Goods Sold are normally made up of items such as materials, labor, packaging and shipping.
Your gross profit is calculated by taking your total revenue amount and subtracting your total cost of goods sold. This amount will tell you how profitable your business is before taking into account any of your overhead or other expenses. You should ALWAYS have a positive gross profit amount. If your business shows a negative gross profit amount, you will need to look into each product you are selling and make sure you are selling it at a price that you are not loosing money. This is why when you are setting your selling price for a product you need to consider ALL things that go into selling that product – or your cost of goods sold. If you have a negative gross profit amount, you will never have a net income, and since we are all in business to make money, you definitely want to ensure your business is showing a positive gross profit amount. The only way to increase your gross profit is to either have more sales or to decrease the amount of cost of goods sold you have.
Next up are your operating or general expenses. These expenses include items such as rent, office expenses, utilities, bank service fees, interest, advertising and telephone expenses to name a few. You will normally list these separately so that you can easily see how much each of the items are when you quickly glance at your Income Statement.
Like I mentioned above, the only way to increase your gross profit is to either increase your sales or to decrease your cost of goods sold. Similar to this, the only way to then increase your net income would be to take this one step further and try to decrease your operating or general expenses.
And lastly, is your total net profit or loss. This is commonly referred to as “your bottom line”. Why, well – because it is actually the bottom line of your Income Statement. This total represents the total net profit or loss for your business as of the period of time you are referencing.
If you are using a computerized software system such as QuickBooks, you can easily customize your Income Statement to compare your current Income Statement to another period such as the prior year or prior quarter or month. This is done with a few clicks and before you know it, you are comparing your Income Statement to another period of time. This can help you gauge how your sales are doing, or even if you have a certain expense that is extremely higher than that prior period. It will help you dig deeper to see how your business income and expenses are trending and if there is anything you should be changing as you move forward in your business.
Your Income Statement is one of the top two financial reports you should be reviewing on a consistent basis. We talked about the Balance Sheet in last week’s episode. If you haven’t listened to it yet, I strongly suggest you listen to it.
So why is it so important to look at both of these reports together? If you don’t have the numbers correct on your Balance Sheet, there is a very good chance your numbers on your Income Statement are wrong as well. These two reports go hand in hand with each other. Lets take for instance if you have a line of credit with your bank. Like any line of credit, you would receive periodic advances and you would be making payments on this line of credit throughout the year as well. If you don’t reconcile or make sure that the ending balance of this line of credit is correct each month, or at the very least at the end of the year, you may be over or understating your interest expense. When you make a payment for your line of credit, part of this payment would be the principal portion which would reduce the line of credit balance and the other part would be your interest portion. The principal portion of the payment is reflected on your Balance Sheet and would reduce the line of credit balance. The interest portion of your payment increases your interest expense which is on your Income Statement. If you don’t record your payment correctly, your line of credit balance would be over or understated, and would cause your Income Statement to be incorrect as well. If you recorded your full payment to your line of credit for example, and didn’t record your interest expense, you would then be understating your interest expense which would overstate your net income since this interest would never have been recorded on your Income Statement. If nothing else changed and you took this information to your tax preparer and they only looked at your Income Statement, you would be overstating your income by that same interest amount. Let’s get this straight…we never want to overstate our income when we are preparing our tax returns…right? We want to make sure our numbers are correct and we are reporting the correct taxable income. I know this can be complicated, and my goal is to try to simplify this information, so to summarize, you want to make sure you are checking all of your balance sheet amounts to ensure both your balance sheet and your Income Statement reports are reflecting the correct amounts. You can see from this example just how your Balance Sheet and the Income Statement are linked together. Every entry you make in your bookkeeping system needs to balance between the Balance Sheet and the Income Statement. You will see in the equity section of your Balance Sheet a line called Net Income or Net Loss. This is the bottom line from your Income Statement and this is another way you can quickly see how if your business is generating a profit at a certain point in time.
One more thing…make sure you check out the additional links for this podcast where you can grab the 5 Essentials For Stress Free Bookkeeping and the Online Virtual Bookkeeping Business Starter Guide. Both are filled with important and actionable information to help your small business and they are listed right where you listen to this podcast. I am also looking for a few accountants and bookkeepers interested giving me feedback on an upcoming opportunity. If you would be interested, I have a link in the show notes for a founding member opportunity just for you. And, you know you can always go to www.FinancialAdventure.com or email me at Info@FinancialAdventure.com for more information. I personally respond to all my emails.
And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.
