Building a Financial Plan for Your Business: Income Statement

A sound financial strategy is the foundation for a successful business venture, and for this reason we’ve created a series about the different aspects of building a financial plan. This week’s topic: the income statement.

What is an Income Statement?

There are three primary financial statements that are important for your business. Balance sheets show the difference between your company’s assets and liabilities. Cash flow statements record the fluctuations in cash while income statements show the net profit or loss during a time period. To better understand how these three statements work together let’s return to the analogy of the lake fed by a stream. The stream flows to and from the lake much like earnings flow in and expenses flow out on an income statement. The lake represents the balance sheet as it monitors the pools of accumulated capital and the water level symbolizes the fluctuations in cash shown on a cash flow statement.

How Does it Work?

Income statements are an easy way for you to see the net earnings or net losses your business generates over a given time period, typically quarterly or annually. To understand your businesses profitability you begin with your revenue, or income earned for the sale of goods and services. If you next subtract the cost of that revenue (such as manufacturing costs) you arrive at gross profit. This is an interim measure of profitability reflecting only the direct expenses of creating a product.

Next, selling, general and administrative expenses are deducted. These expenses include employee wages, the rent for your company’s space and even insurance costs. Finally, after subtracting the interest (the cost of borrowing) and income tax expenses you arrive at your net earnings or net loss.

An income statement is an important tool to use when determining the profitability of your company during a specific time period. By analyzing your income statement you can adjust future expenses and set revenue goals to increase your bottom line. By understanding the various financial statements you will have the tools you need to monitor expenses, cash flow and your company’s financial success.