Home Resource LibraryUsing your Income Statement to Grow your Business Profit

Using your Income Statement to Grow your Business Profit

When was the last time you looked at your income statement for your business?

Was it when your accountant filed your tax return? Do you remember any of the numbers on the page? Did they mean anything to you?

What if I told you that income statements aren’t just for accountants (WHAT?!).

Yes, really! Your income statement is actually a great tool for YOU as a business owner to support your growth. If you use it consistently in making decisions, I guarantee you will see better financial results for your business and quicker growth. (because let’s get real, this usually involves generating money)

Okay, so now that I have your attention, I guess you’re wondering –  what is an income statement?

An income statement is a report that shows you how much money your business made in a specific time period.

Getting an income statement for your business  is easier than ever if you use a cloud-based bookkeeping software. As long as your books and financial records are up to date – you can run  your income statement with a few easy click.

3 Basic Terms you should know:

Once you have an income statement for a relevant period, let’s dig into what some of the words and numbers mean.

  1. Sales – this is the total amount you receive for the goods or services you sell to your clients or customers. Exclude sales tax from your total sales (your bookkeeping software will do this automatically).
  2. Expenses – these are all your costs of doing business – the things you have to buy, the people you have to pay to get the goods or services to your customers.
  3. Profit – is equal to the total of all your sales, less your expenses. It’s the bottom line on your income statement.

Simple, right?

Ok, now you’re one step closer to being a pro. What next?

How often should I look at my Income Statement?

The best practice for businesses of all sizes is to look at your statement every month at a minimum. You may also need to look at different timespans when making specific decisions. When doing this, you should think about what timeframe of data would give you the information you need to make the best decision. For example – if I’m looking at hiring an employee for the next 6 months, I may want to look at my income statement for the previous 6 month period to ensure I can make enough of a profit to cover their salary.

So, now that you are eagerly awaiting instructions with your income statement in hand, let’s get to it!

How will I know if my numbers look good?

Looking at stand alone numbers for one period won’t tell you a whole lot. You need to determine a baseline. Your baseline could be your budget or the prior period. Once you have decided what you are using as your baseline, you would compare your actual income statement to that baseline to understand how you’ve performed in a certain timeframe.

10 Questions to answer when looking at your Income Statement

Here is a little exercise you can do to get you familiar with reading your income statement. Pull your income statement for the last month, and compare it to the prior month. Now answer these 10 questions to begin understanding how you performed in the last month.

  1. Did my sales go up or down compared to last month?
  2. What drove the change in sales – was it volume, product mix, pricing?
  3. Are my expenses higher or lower than my sales for the current period?
  4. Are my expenses this month higher or lower than last month?
  5. Which expenses went up/down compared to last year?
  6. Do I need to cut back on any specific expenses?
  7. Which expenses should I monitor more closely?
  8. Did I make a profit last month?
  9. How does my profit last month compare to my profit for the previous month?
  10. How does my profit compare to what I believe my business should be making?

Once you have answered these questions, you may have some actionable items in order to increase your profit. Since you may not tackle everything at once, I would suggest working in this order: first, look at reducing your overhead expenses, then your direct costs. Then, if you still want to increase your business profits, you might need to think about increasing your sales price (avoid going back to your customers unless you have cleaned house in all other areas).

I recommend that as a business owner, you continue to do this exercise every month to help make adjustments to your sales and expenses until you see begin to see the results your business deserves.

If you are looking for more guidance and accountability to manage your business finances – I have designed a monthly meetup to help business owners increase their profits. In just a few months, you will get clarity over your financials and understand how to generate profit for your business.

Click the link below to get more details and sign-up today.
www.tulacpa.com/moneyclub

Taheera Fidaali, Owner of Tula Accounting & Consulting

Back to Resource Library