Last week I shared some information about creating a simple income statement. Having the numbers is important because it’s the best way to evaluate the progress and growth of your business and to fix any problems in your financial ship before they get out of control.
Today, I wanted to talk about a more thorough way of preparing a monthly income statement – something known as a “Multi-Step” income statement. Once again, I like the way that Brian Sutter from Wasp Barcode Technologies explains it in Small Business Opportunities magazine:
In the multi-step format, line-item information provides a better understanding of exactly where your money is going. This version considers both revenues and expenses that directly relate to production and those that don’t.
Gross Profit = Sales Revenue – Cost of Goods Sold
Another interesting concept is operating income, which results after deducting most costs –direct or not – from the sales or income of your organization.
Operating Income = Gross Profit – Operating Expenses
Finally, net income includes tax payments, and is the same in both formats.
Net Income = Operating + (Non-Operating Income – Expenses)
Going into more detail like this can paint a more realistic picture as to why your business is pumping out the numbers it does. You might have record sales one month, but if you are paying huge rental or licensing fees, will those sales be enough to make a profit?
Even though it might not be your favorite way to spend a couple of hours, going line by line through your income and expenses will let you make informed decisions and keep your business in the black.
Learn more about Small Business Opportunities magazine here: www.sbomag.com