For every business, it is important to record revenue and expenses in an organized manner. The arrangement of profit and loss information in the form of data is useful when making new strategies and work policies. A business with regularly updated, gathered income and expense details can run smoothly because the weak areas are visible, they tell a story, and you can work on them. In this article, we’ll discuss what an income statement is, as well as learn how to make one and why doing so is important.
What Is a Business Income Statement?
The finance department of every company has to update and present multiple types of financial statements, which conclude on the efficiency and performance of the business operations. One of these financial reports is the income statement. It is also known as a profit or loss statement, made to show the details of all the net profit or revenue generated from the business resources, minus all expenses. An income statement is a very active way to evaluate the financial performance of your business by comparing the income with the expenses. It also provides information to the investors about the progress of the company and trend analysis over multiple periods, whether months or years.
How to Make a Business Income Statement?
If you are struggling to manage your financial data, the best way is to make individual statements for different areas of finance. For example, a balance sheet is a snapshot of the company’s financial health, a comprehensive financial statement to check the accuracy of a business’ financial position, and an income statement to record the profit and loss details. Below, we’ll discuss how you can create an income statement for your business.
Define a specific time
To produce an income statement, the most important thing is to outline the time in which you want to check the profit gain or losses of your business. Pick a defined business period and gather all the required data according to it (monthly, quarterly, annually).
Gather revenue figures and balance amount in business accounts
You need to gather all the information related to the revenue generated in that specific business period. For example, you have three product lines being sold to customers, and you also may have other bits of income, such as a rebate from your insurance provider. All of these need to be added together.
Calculate all the expenses on business operations and tax
Now, calculate all the money you spent to carry out the business operations, such as marketing, advertisement, deliveries, purchases, workforce administration, etc. Also, include the tax amount that you’ve paid during that time.
Calculate net income for the statement
After summing up all the revenue or income from the sales, subtract the expenses from it as well as any applied taxes. This will give you the number representing your net income. Write down this income at the bottom of your statement.
Importance of the Business Income Statement
In today’s world of competition and advancement, a periodic income statement is very important for finding the flaws in your strategies and for setting new plans. Below, we discuss some great reasons why every business or company needs to prepare a business income statement.
Reviewing your profit and loss statement enables you to be aware of the financial situation of the business and to make wise decisions according to it. The accurate figures and numbers are more helpful in making new and precise policies.
Tracking Your Progress
By making an income statement, you can easily track your progress and check the effectiveness of strategies and success rate of your business operations. Moreover, it also provides the necessary information to stakeholders and investors about the growth of business and the fate of their investment.
An income statement helps the business to determine the future of its financial trajectory. Based on an updated income statement, you can make predictions about the growth patterns of your business. As mentioned earlier, a thorough analysis of the income statement reveals the less obvious issues that affect the profitability.