Income Statement

Income Statement measures profitability of a business. it’s reports are typically viewed on a monthly, quarterly, and annual basis.

Components:

  • Cost of Goods Sold(COGS): cost of creating products or providing services.
    • Tracking Cost of Goods Sold leads to creation of a Gross Profit subtotal. This allows you to see, and track, your cost directly related to the product or service.
  • Overhead expenses: cost required to run the business, but not directly related to revenue
    • General & Administrative Expense: This is anything not-related directly to Revenue, but the cost of operating the company.
    • Business development expenses (sales, marketing, or advertising)
    • Facility costs (rent, repairs and maintenance, or utilities)
    • Software and subscriptions

Compare specifics:

  • Budgeted versus actual: This tells you how well you did versus your plan. Things happen throughout the year, so it’s important to consider the change in circumstances.
  • Current year versus previous years:
    Compare each line item to the previous year and consider:
    • did it increase/decrease proportionally?
    • what conditions changed that would change expenses?
  • Change in revenue, Gross Profit & Profit:
    When looking at these raw numbers, you want to see:
    • where they’re trending
    • confirm they’re accurate
  • Percentage of Gross Profit & Profit:
    Percentages allow you to compare multiple years easily.
  • Debt service coverage ratio: used by lenders for decision making.

Formulas:
Profit = Revenue - Expenses
Gross Profit = Revenue - COGS
Operating Income = Gross Profit - Operating Expense
Profit before tax = Operating Income - Non-Operating Income (excluding tax)
Debt service coverage ratio = Operating income / Debt service
Net Change Formula = Current Period’s Value – Previous Period’s Value