As an entrepreneur or small business owner, you have an incredible amount of domain knowledge and experience in the industry you serve. You are a fabulous artist, the most sought after graphic designer, an incredible professional organizer, so on and so forth. But, you may not have a lot of experience in managing the finances of your growing business. You know how to send invoices, pay bills and review your bank account, but do you know how the business is actually performing? Do you know how to int
erpret those fancy reports that your accounting software is producing for you? Which ones should you even be looking at in the first place?
We are here to help! In this post, we’ll briefly explain how to review the marquee of all financial reports, the income statement. Also referred to as a profit and loss statement or the P&L, the income statement will provide you with a breakdown of how you made your money, how much money you spent and how much is left over.
The following advice is based on the P&L formatting that I recommend my clients use. You can access a template version of that format here. When reviewing an income statement, you want to review the following things:
- Ensure that all expenses are categorized correctly. Pay close attention to miscellaneous and re-categorize any expenses that are categorized as Miscellaneous.
- Ensure that no big sales or expenses are missing. Is that new deal you closed at the end of the month captured? Is the office rent included?
- Utilizing the % of revenue columns, look at the detail of into your top 5 expenses. Think critically about those top categories and evaluate whether that is bringing the most value to your business – change vendors or purchasing strategies accordingly.
- Utilizing the % of revenue columns, review top 5 income and expenses accounts where monthly % and YTD % differences are the greatest – Again, think critically about why these differences may be appearing and what to do about it.
- Review Gross Profit (income – cost of goods sold) – you should know what your industry standard gross profit metrics are, and shoot to beat it or at least match it
- Review Net Income (Income – all expenses) – do you have positive net income? are you on track for the year or not?
- Compare your budget to actual numbers – look at the differences between budget to actual and analyze the top 5 biggest differences.
Many customers are overwhelmed by this list – it is a lot to look at on your already busy schedule. But, rest assured by taking this approach and reviewing their income statements on a regular basis, I’ve seen customers make more sales and save hundreds of thousands of dollars. Download our income statement template
today and give us a call if you need help!