Welcome to the second part of our three part series of the most important financial statements for a small business owner to know. The income statement, which can also called the P&L (profit and loss statement), is another important financial statement for your small business. We are going to start with a overview of how the statement is arranged, then we are going to dive into how to read the statement in a meaningful way.
In order to build an income statement you will decide on a time period and list out your revenue and expenses accrued during that amount of time. After getting a total for all your revenue this is considered your top line. Then total up the amount of expenses and subtract your expenses from your revenue. This is your net income or bottom line. The income statement is an easy financial statement to build as long as your accounting of your revenue and expenses were accurate.
Reading an income statement is more than just seeing if a business was profitable. The income statement is different from the balance sheet because the balance sheet shows a snapshot of a business at a single point in time. Where the income statement uses information over a period of time. You can find the gross margin by dividing the gross profit by the revenue. The net profit margin can be found by dividing the net income(after taxes) by the revenue. The return on equity can by useful to see how well you are investing your money, by dividing the net profit by the average shareholder equity for the period.
Though the income statement is easy to prepare, the strength lies in what the numbers allow you to see rather than what the top and bottom line are themselves.
The Pathways Team