Income Statements Made Easy for Business Owners

A business owner’s income statement is a key part of their financial story. You might be tempted to leave as much of your accounting work up to your bookkeeper, sure. But your income statement — which you also might know as your Profit & Loss, P&L, or earnings statement — is something you should know how to read (and produce) own your own. 

A P&L gives small-to-medium enterprises (SMEs) the crucial understanding of the actual net profit of their business. In other words, it’s the only way you can actually figure out if your company is making money — and whether you might want to adjust your cash flow management processes to get yourself to profitability. 

What’s inside an income statement? 

An income statement, also known as a Profit & Loss statement, is like your business’s financial report card. It shows how much money your business makes and spends over a specific period, helping you see if you’re making a profit or facing losses. Understanding it is key to making smart decisions about your business. You don’t have to be an accounting expert to grasp its basics. Many small business owners keep an eye on their income statements quarterly or monthly.  

If you’re using small business accounting software, like QuickBooks Online, you can create an income statement within the application. At Forwardly, our free cash flow forecasting uses your income statement as a primary source for analysis and insights. 

What does an income statement show? 

When someone’s on a diet, they’re supposed to log calories in and calories out. It makes sense why a dietitian would recommend a food and exercise journal — if you’re trying to get a sense of whether or not you’re on the right path to losing weight, you have to understand whether you’re eating more or burning more. Your net calories will tell you. 

In a way, your statement of income is like your business’s diet plan. You have to figure out if you’re spending or earning more, and your net profit will reveal that. Spend more than you earn and you’re in the red; flip that, and you’re in the black. 

The numbers on your P&L will allow you to get a sense of the answers to these questions: 

• Is my business generating a profit? 
• Am I spending more than I’m earning? 
• When am I spending the most, and when are my costs lowest? 
• Am I paying too much to produce my product? 
• Do I have money to invest back into my business? 

And, the more granular your records, the better able you’ll be to identify trends. Your income statement, cash flow statement and balance sheet are three of your main financial reports.  

How do you read an income statement? 

There are a few essential elements of a Profit & Loss. You’ll need to understand the fundamental differences among them all to not only put one together but to also read one, too. The first two are the most important of all: 

• Revenue: What your business takes in. This combines any revenue stream, whether it’s from a retail storefront, e-commerce, wholesale business, passive investments — you name it. Put that here. 
• Expenses: What your business spends. This includes both the fixed and variable costs for making your company run on a daily basis. Think salary, overhead, redesigning your company website, software. 

Then, you’ll also want to know: 

• COGS: Cost of goods sold. This means taking into account the component parts of what it takes to make whatever it is you sell. So, even if the candles in your shop sell for $18, you need to think about the expenses to get the goods ready for sale, like the jars, wicks, wax, and labels. This is most important for product businesses, less so for service businesses who may not have a COGS. 
• Profit: Your total expenses minus your total revenue. Although this seems straightforward, this doesn’t tell the whole story. 
• Gross Profit: Your total profit minus COGS. You end up paying your business’s operating expenses from your gross profit, so this number is arguably the most important of all to understand from your income statement. 

You might also hear the abbreviation EBIDTA, which means “earnings before interest, depreciation, taxes, and amortization.” Don’t worry about that too much unless you’re dealing with investors or you’re a very high-grossing business (in which case, your accountant will help you out). But this number provides a very clear picture of how your business is doing without these other factors. A look at the cold, hard financials of your business beyond cash flow, since it looks at non-cash items, too. 

Your income statement will include some other terms, too, but these are the ones you’ll need to grasp to use a P&L effectively to make decisions for your business. 

Who looks at your income statement? 

Some or all of the following parties will or should review your P&L statement: 

• The Internal Revenue Service (IRS). You might need to prepare your Profit & Loss for any number of reasons. In the most basic sense, the IRS will generally need to take a peek at your income statement — along with your balance sheet and cash flow statement — to verify your business’s financials. If for no other reason, that should give you a big incentive to keep this important document clean and up to date. Also, your business income taxes are based on your profit each year. 
• Small business lenders. In many scenarios, lenders require you to submit your income statement with your application for business financing. That especially goes with term loans where lenders will be taking a hard look at whether or not you can handle your repayment. 
• Investors. Unsurprisingly, if you’re courting investors — or vice versa — submitting a Profit & Loss in due diligence will be a must. For lenders to get a true understanding of your financial picture, they’ll take a hard look at your books. This is where EBITDA on your statement of income will be important, as well as your cash flow forecasts. Detailed records are essential here. 

• Buyers or clients. If you’re planning on selling your business — or even doing business with new clients — you should prepare to have your P&L ready to show. The income statement gives partners a sense that you’re solvent. 
• You. (No exceptions on this one.)As a savvy business owner, the more time you spend in the weeds understanding where you’re spending and where you’re earning, the more intelligently you can make decisions. The more helpful you find your P&Ls, the more you might find you want to keep more frequent records. 

What is the relationship between cash flow and your P&L? 

First, your income statement will part the clouds about your net profit. Should you be looking into different manufacturers or suppliers to lower your cost of goods and spend less? Should you be shifting a portion of your production to a different season to even out your cash flow? Toward that end, you’ll also be able to spot important seasonal fluctuations in your finances. Even if you’re not making tweaks to your cash flow management processes based on this info, you must know the trends. 

Forwardly offers a cash flow forecasting tool that provides valuable insights into your business’s income and expenses on a monthly, quarterly, and yearly basis. This tool empowers you to anticipate periods of extra cash and plan for times when savings are needed. Getting started with Forwardly is effortless and free – you gain access to the cash flow forecasting tool, as well as accounts receivable and accounts payable automation, without any subscription costs.