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Back to Basics – Managing Your Finances 101 – Week 2
It’s easy to become daunted when faced with the intricacies of financial statements, especially when you’re a new business owner. Fortunately, you don’t have to have an MBA in order to make sense of your financial statements, and you don’t have to fear the challenges presented by this very important part of your business.
Week 2: What is an Income Statement?
An income statement is a financial statement that tracks revenues and expenses — money coming in and going out — so you can watch how your business operates over a set period of time. Its main purpose is to show and track whether your company made or lost money during the reported period. Sounds like worthwhile reading material, right? Read on to find out how to make sense of your own personal best seller.
Income statements should be helpful to small business owners in particular, who can use these statements to “find out what areas of their business are over budget or under budget,” says BusinessTown.com. “Specific items that are causing unexpected expenditures can be pinpointed, such as phone, fax, mail, or supply expenses. Income statements can also track dramatic increases in product returns or cost of goods sold as a percentage of sales. They also can be used to determine income tax liability.”
There are two types of income statement, the basic “single step” method, and the slightly more complicated, yet more revealing, multi-step method. Both have their merits; sometimes all you need is a bottom line, while other situations may call for an in-depth view.
The chart below, courtesy of Investopedia.com, compares the single-step side by side with the multi-step:
| Multi-Step Format | Single Step Format |
| Net Sales | Net Sales |
| Cost of Sales | Material and Production |
| Gross Profit* | Marketing and Administrative |
| Selling, General and Administrative | Research and Development Expenses |
| Operating Profit* | Other Income and Expenses |
| Other Income and Expenses | |
| Pretax Profit* | Pretax Profit |
| Taxes | Taxes |
| Net Profit (after taxes)* | Net Profit |
Investopedia then goes on to explain the charts, noting the differences and expounding on their uses: “In the multi-step income statement, four measures of profitability (*) are revealed at four critical junctions in a company’s operations – gross, operating, pretax and after tax. In the single-step presentation, the gross and operating income figures are not stated; nevertheless, they can be calculated from the data provided.”
What challenges have you faced in interpreting your income statement?