Is your business profitable? There is only one way to know: checking the bottom line using what’s called an “income statement” or “profit and loss” statement. Let’s have a look at how an income statement is prepared and why they are so important.
At its most basic, a monthly income statement looks like this: Net Income = Revenue – Expenses.
Each month, every business (even ones made up of just you) should crunch the numbers and see where they stand. Small businesses tend to have very small profit margins, so any leaks in the financial ship should be detected early and taken care of.
So what kinds of things make up revenue and expenses? Although I can’t make an exhaustive list here, the bullet points below can get your mental juices flowing:
Revenue:
- The money you make selling a product or service
- Any increase in the value of assets, (real estate, patents, etc.)
Expenses:
- Overhead to run the business (insurance, rent, utilities, etc.)
- Promotional samples given away
- Advertising, marketing, space rented at a trade show
- Damaged products
- Sick days
- Loss in value of assets (real estate, patents, etc.)
Although sitting down to work out these numbers on a spreadsheet doesn’t seem like a lot of fun – in the beginning you will most likely have to do it yourself. You might be able to use an accountant in the future, but even then you will need to provide the accountant with accurate figures and estimates.
A monthly income statement is a good way to verify how your business is doing. There’s nothing like removing the emotion and looking at the numbers with cold logic to see how you are really doing.
For more information, have a look at the spring 2014 issue of Small Business Opportunities magazine, on page 8.
Here's a link to Small Business Opportunities magazine http://www.sbomag.com/articals/magazine/