As a business owner, you need to own your numbers and understand your numbers in order to make the best, data-driven decisions in your business. The income statement (also called the profit and loss or P&L statement) is where you keep score in your business. You’re keeping score of how your business is operating, and it’s a critical measure that goes hand in hand with the balance sheet. All of your results from your income statement flow through to your balance sheet.
The income statement summarizes all the income and expenses of your business over a given period of time. Monthly, quarterly, semi-annually, and annually are the standard periods of time. Those frequencies are relevant to your decision making in your business. You can look at these numbers compared to previous periods of time to get a lot of good information.
The income statement is really measuring the profitability of your business. We can also see some really helpful trends across time and different metrics like income and expenses. You get to look at those numbers and ask: why? Be curious. Understanding why your numbers change over time is one of the real benefits of your income statement.
We can also look at the income statement in relationship to historical performance from last year or expected performance in the form of our budget. Benchmark reporting can help us better understand how our operations are performing. Every month, we should be looking at some type of benchmark for comparison purposes even if you haven’t done a formal budget.
I love looking at the last twelve months report (LTM, or trailing twelve months TTM) on a rolling basis because that really tells a powerful and clear story. All together, this whole collection of reports tells the story of your performance. And when you know that, you can make wise and informed choices on how to move forward.
The buckets in an income statement include:
- Cost of goods sold
- Gross profit – the first subtotal we see, total revenue less cost of goods sold
- Expenses (overhead)
- Operating income – gross profit minus expenses
Understanding these numbers will keep returning to you over time what’s important, and how to manage it even better. It allows you to benchmark, do ratios, create projections, analyze your business and make decisions about how you can manage the business better to make more money and benefit employees, customers, stakeholders, and even your community.