Mastering your income statement is something many are troubled with, when they need to know where to cut. It is especially hard for those in business with shoe box accounting systems. But by removing the jargon it then becomes more understandable and moves it to the more friendly category of “accounting for non accountants”
A simplified view can also help business managers understand what drives their business and what adds value to the bottom line. Technical accountants can communicate better too in more lay persons terms.
Here are some simple definitions :
Often called the “top Line” this represents the amount the company has sold during the period. When there is more than one line of revenue shown above the Total Sales Revenue it provides detail as to which products or services are major revenue producers.
This is what it cost the company to generate the sales shown in Total Sales Revenue above. Compare the total costs to the total revenue, but also look at the cost of each line of product or service versus its revenue. Sales Costs is also known as Cost of Goods Sold (CGS).
3.Gross Profit or (Loss).
This is the difference between Sales Revenue and Sales Costs. If the difference is positive, and it had better be, it is profit. A negative difference is a loss and is shown in brackets.
4.General & Administrative expenses are called G&A.
These are the costs associated with running the company as opposed to the costs of making or buying the products (CGS above). These costs should be monitored closely and kept as low as possible.
5.Sales & Marketing expenses.
These are other costs not directly related to producing the product or service to be sold. While certainly necessary, sales and marketing costs should be monitored and compared frequently to similar numbers from other companies in the same industry with products in the same point in the life cycle.
6.Research & Development (R&D) expenses.
This is the part of its income a company is re-investing in the business to find and develop new products. It’s an indication of how much management values innovation. Look at whether it is increasing or decreasing from year to year.
This is what’s left when you subtract all the operating expenses from Gross Profit.
8.Income Before Taxes. After subtracting any interest paid on outstanding debt from Total Operating Income you are left with Income Before Taxes. This is the amount on which the company expects to have to pay taxes.
This is the amount the company has paid or expects to pay in taxes for the period. It includes all taxes to all jurisdictions.
10.Net Income From Continuing Operations.
After subtracting taxes from its income, this is what the company has left. Think of it like a workers take-home pay.
This varies from industry to industry, but is a good measure to compare similar companies, from either an investment or a benchmarking perspective. It’s like the interest rate you get on your investment. The 5-6% shown by this company seems low for a manufacturer and would warrant looking into.
This is the cost of any one-time expenses, for instance, restructuring the business, a major layoff, or an un-reimbursed casualty loss. These are shown on a separate line so as to not confuse the “continuing operations” figure above.
This is what the company has left after subtracting all its expenses from its total revenue. If the difference is positive it is profit. A negative difference is a loss and is shown in brackets. For a company to remain healthy and in business, this number needs to be positive most of the time. Most for-profit companies strive to make it as big a positive number as possible.
14.Dividends to Shareholders.
Companies pay dividends to the shareholders who own the companies. If any dividends have been paid during the period being reported, they are shown on this line. These can be to common stock holders, preferred stock holders, or other investors depending on the company. Dividends usually are paid only once a year.
15.Net Income Available to Shareholders.
This is “the bottom line”. This is the money the company has left at the end of the period. It is held for future needs, invested as the Board directs, or returned to investors in the future.
A friend provided this material. It would good to see what he suggests to manage the balance sheet especially for wealth creation and exit strategies for SMB’s. Perhaps he will share that too so I can re-publish too.
In the meantime to give him a plug if you are in the US and or near the Boston area I am sure he would love to help you with your business. http://abusiness-consulting.com/or call @ +1 508-620-4579
While I am in the mood to do free plugs, if you are near my firm in Melbourne Australia and want help relating this to your performance management to improve your bottom line, our team will be delighted to help. http://shernox.com. Or call me at +61 3 90185302