ARE YOU ASKING YOURSELF THESE SEVEN QUESTIONS CONCERNING YOUR BUSINESS INCOME STATEMENT?
When looking at an income statement, these 7 questions are all that you need:
Before we jump in, Let’s define what an income statement is. Revenue – Cost of Goods Sold = Gross Profit,
Gross Profit – Operating Expense = Operating Income,
Operating Income – Non-Operating Income/Expense = Net Income Now to the questions:
- What did your revenue(sales) do?
If revenue isn’t growing, this is the first sign the business might be struggling. But revenue growth that’s slower than your industry or the economy is also bad. Understanding this trend is essential.
- What product/service drove revenue growth?
Most companies have more than one product and/or service. Understanding which drove revenue is important because it helps you identify which aren’t doing well and need attention.
- What did your gross margin do?
Gross Margin = Gross Profit / Revenue When margins go down, that’s a significant cost of goods increased or your prices decreased. This is one of the numbers I watch the closest on any income statement.
- Did Operating expenses go up or down relative to sales?
Operating Expenses are expenses needed to operate the business, but not directly related to a sale. When revenue goes down, operating expenses should go down (but this is often difficult).
- How does this year compare to last?
Understanding the trends helps you understand the business. Revenue up? That new salesperson is paying off. Marketing expense up? Dig in to figure out if you’re paying too much.
- How do expenses look compared to the budget?
Every company should create a budget. It helps remind you what your plan was at the beginning of the year. When expenses get out of line with the budget, it’s important to dig in and understand why.
- Why did the profit margin change?
Profit Margin = Net Profit / Revenue Profit is the ultimate goal of a business, so it’s important you have margins healthy enough to support the growth of the business.
Monitoring these items will help tell you when your company is healthy, but they’re not all-inclusive. Know more from our newsletter so you don’t miss out on future articles.