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Income Statement - The Score Card
The Income Statement sometimes called Statement of Earnings, Profit & Loss Statement, or just plain P&L lets you know if you are winning or losing in the game of business. A golf analogy is appropriate here although the only thing good about my golf game is my price per stroke, it’s really low, but at least I get my moneys worth. Counting every stroke in golf lets you know if your game is really improving. The Income Statement like a golf score card tells how a business is doing. Is it improving or getting worse, in a temporary slump or is the trend really downward, have you had a string of successes, are they temporary or permanent? The answers to these questions all come from the Income Statement.
The Income Statement is probably the most recognized and understood of all the financial statements. It is fairly straight forward with gross sales at the top and expenses subtracted as you move down the report leaving either a net positive or negative at the bottom, or bottom line. An Income Statement that consists of just two groups: sales and expenses as describe above is called a “Single-Step” Income Statement. In this format total expenses are subtracted from total sales as a single step, to arrive at net income or loss. The advantage of the Single-Step is its simple presentation and the absence of any implication that one sales or expense category of revenue has priority over another .
With a couple of minor additions your Income Statement can become an even more powerful management tool. The addition of a percentage column to the right of the total column, were total sales equals 100%, will give you the percentage of a sales or expense source in relation to total sales. This is also referred to as “Common Sizing” an Income Statement and is helpful in comparing sales sources or expenses and establishing goals based on a percentage of sales. For example you want to reduce material costs by 5%, going from 25% to 20%; you focus on finding a cheaper source of material and can track actual results compared to your new goal.
Another useful twist is a “Multiple-Step” Income Statement. By separating operating expenses from administrative and sales expenses you can quickly determine the direct cost of delivering your product or service. This allows you to focus on the cost of sales; cost of goods sold for retailers, to better manage the most critical costs associated with running a business. A 5% reduction in operating expenses will have a bigger impact on the bottom line than for example a 5% reduction in advertising expenses. You don’t have to be a retailer or manufacturing concern to use a “Multiple-Step” Income Statement, it works nicely with service based businesses.
We discussed the Cash Flow Statement, December 2008 B/NV, Balance Sheet, February 2009 B/NV, and now the Income Statement. Whenever you hear a reference to “financials” it means theses three statements. These three statements provide all of the financial information needed to get to know a business and make informed decisions about profitability, investment, or credit. A detailed analysis, ratio analysis, of a businesses Activity, Leverage, Liquidity, and even Risk can be determined from these statements and will be a topic in the next issue of B/NV.
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Library of Congress Cataloging-in-Publication
Business/News & Views® / by David. W. Weatherholt
ISBN: 978-0-9823041-1-2 (electronic format)
Published in the United States of America through www.waconsult.com
Published in an electronic format by Weatherholt & Associates, LLC
First Trade Publishing: October 2008
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