The Income Statement is one of many reports a business owner should be looking at on a regular basis to ensure their business stays on track. Understanding the Income Statement is a must.
When your accounting software has a report named Income Statement and you print the report do you know what it means? Do you know what each line represents? And what the number at the bottom whether positive or negative means? Or do you see the bottom number as a profit and say to yourself where did all the profit go??
The income statement is like a roadmap
Every business needs to know how it is doing every month (at the very least). When not looking at some sort of Income Statement or Management Report, it is like driving to an unknown destination without a map. Any business owner should be looking at these reports not because a banker wants them but because they are running their business and want to know how the business is performing.
The Income Statement is the report that will show revenue, the expenses associated with providing the services or the goods for the business, as well as the expenses necessary to operate that business. The income statement will also show a business owner if they made a profit or loss in the time frame they are looking at.
The way you read this report will depend a lot on whether your accounting is based on cash or accrual accounting. When an Income Statement is run in the cash basis of accounting it means cash in as well as cash out is reflected in the Statement. Using an accrual method to run the Income Statement will report what has been invoiced for the business (not just paid) and what has been billed to the business (not just paid out). The accrual basis generally will be a better match of the revenue with the associated expenses to produce the product/services as well as the operating expenses without regard to when cash comes in or goes out the door.
Understand the bottom line of profit and loss
The bottom line of the Income Statement is the net profit or net loss of that business for that timeframe. It is important that a business owner understands what all the line items are on the Income Statement. This is when a good CPA is a valuable asset to have on speed dial. If the numbers look out of whack, there may be a good reason that a CPA familiar with your business can explain to you or it may indicate the business is having some issues which, again, a CPA can help you create a plan to help with an issue before it turns into a problem. Looking at these numbers on a regular basis and understanding these numbers allows a business owner to address issues before they become problems.
These reports will tell a business owner, of course, how the business is doing for that month but compared to what? Looking at your income statement is good when comparing it to your prior month and/or year. Another good way of looking at this report is comparing it to your budget for the year.
The Income Statement can give a business owner a look not only at the current period but also it can be used to see trends, good and bad. The Income Statement with other Management Reports that are reviewed regularly will help keep a business running smoothly.