As a business owner or manager, reviewing financial statements is a crucial aspect of keeping your company on track, and the Income Statement is the “go to” profitability tool for most. Still, it can be overwhelming to know where to start or what to look for. That’s why we’ve compiled a list of ten tips to gain more valuable insights from your income statement.
1.Think Big Picture
Always have your profitability goals for the year in mind. Do they include increased revenue? More net profit? Getting a handle on labor costs? Improving ROI from customer acquisition investments? Laser focus on your goals will guide how you organize your financial reports and review results with your team.
2. Keep It Timely
Set the expectation with your accounting team to receive an accurate income statement no later than the 15th day following the end of each month.
3. Compare Apples to Apples
Use a chart of accounts that is appropriate for your industry. This will enable you to group accounts in a way that makes sense for your business model, your overall goals and compare yourself to your industry peers.
4. Group Your Expenses Logically
Categorize expenses in functional groups rather than showing all the details. In our example, the major groups are employee expenses, occupancy, selling, vehicle and other operating expenses.
When you organize expenses into groups instead of browsing through a lengthy list of alphabetized accounts, you can quickly assess the costs of the key areas of your business.
By “rolling up” the details to the category totals you can fit the income statement onto one page. This makes it easier to see the trees for the forest. You’ll quickly spot important trends in revenue and costs of your primary business functions. If an area bears investigation, delve deeper into supporting schedules for the details.
Tip #5 is critical to helping you pinpoint which items to investigate.
5. Choose the Columns Intentionally
Always include a percentage of sales column to quickly assess how much was spent in each functional area for every dollar in sales. Check out the example below:
In our example, Metro City Carpets is determined to improve their Gross Profit Margin. By looking at their past three years’ Income Statements, they noted a drop of almost 1% (from 42.5% in 2021 to 41.7% in 2022). Gross profit dollars have increased nicely. Without the percent of sales column, they might think they are improving profitability when in fact they are becoming less efficient at earning gross profit from sales.
Further, the average gross profit for others in their industry is 50%. That’s more than 8% better than Metro City’s gross profit. In other words, they are leaving more than $300,000 in profit on the table (8% of $3.8 million). They’re not crazy about where things stand but at least now they are aware they have a problem. You need to spot things like this during the year when there is still time to investigate and take action, which leads to our next tip.
6. Spot Fluctuations Sooner
Compare current month expense percentages to year-to-date to spot short term trends that warrant further examination and action.
7. Look at Past History
Compare year-to-date to prior year percentages for the same period to spot longer term trends. If you can’t easily explaina the fluctuation, dig into it.
8. Stay on Track with Your Budget
Compare year-to-date actual to budgets and examine variances to determine whether corrective actions are needed to stay on track with the plan.
9. Take a Monthly Growth and Seasonality Snapshot
Prepare a 12-month P&L report with a column for each month and the year-to-date total (either rolling 12 months or calendar year). Chart major items like sales, gross profit percentage and your expense category totals as a percent of sales. Charts help you visualize things differently making it easy to appreciate how seasonality impacts your sales, costs and profits.
10. Consistency Improves Efficiency!
Establish a list of reports for your standard monthly review packet. Identify the level of detail (category totals or details) and the columnar comparisons to be included. Then communicate the expectation: to receive the same define reports, in the same format, same order, each month – no later than the 15th! Set a recurring date and time on your calendar for a review session and show up for this critical appointment. Whether it’s just you or an entire team, it is equally important that you show up!
Developing a consistent and efficient review routine will keep you on top of your business’s financial performance. By following these ten tips, you’ll be better equipped to analyze your income statement and make informed decisions for your company’s future.
More Resources for You
Listen as Profit Soup Founder Barbara Nuss shares her thoughts about “How to Get the Most Out of Your Income Statement” in our newest Podcast series, Small Bites of Business Insights, produced in conjunction with the Kathleen Gosser, PHD, Director of the Yum! Center for Global Franchise Excellence at the University of Louisville.
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