Income Statements
Lesson 7 from: The Small Business Simple Guide to FinancesAmy Northard
Income Statements
Lesson 7 from: The Small Business Simple Guide to FinancesAmy Northard
Lesson Info
7. Income Statements
Lessons
Know Your Worth
1The Foundation of Your Business
09:38 2Creating a Usable Bookkeeping System
05:52 3Taxes
06:45 4Get Paid
05:48 5Small Business Deductions
06:30 6Retirement Contributions
06:12 7Income Statements
05:26Balance Sheet
05:39The Foundation of Your Business
Lesson Info
Income Statements
1 (upbeat music) 2 Welcome to lesson seven. 3 Today's lesson is all about using your income statement 4 to know your worth. 5 Our three goals for this lesson are: 6 Understand how to read an income statement. 7 Use an income statement to determine your worth. 8 And analyze an income statement 9 to continually grow your business. 10 The best way to learn how to read an income statement 11 is to look at an example. 12 My example client, Stephanie, runs a photography business, 13 and here we have her income statement 14 for the first quarter of the year. 15 This income statement tells us a lot of information 16 about Stephanie's business. 17 First up, there's the gross profit, 18 which is calculated by tallying up 19 sales for that period of time 20 and subtracting the cost of goods sold. 21 For Stephanie, cost of goods sold 22 includes things like travel costs 23 to get to photo shoots. 24 If you're a potter or an artist, 25 your cost of goods sold would include 26 all of the raw mater...
ials that go into each piece. 27 If you're a freelance writer, 28 you might have no cost of goods sold 29 since producing your work may just involve 30 typing a document on your computer. 31 Next, there's a rundown of regular operating expenses 32 involved with running the business. 33 These are administrative costs. 34 Stephanie deducts the day-to-day expenses, 35 like rent for her coworking space, 36 her part-time personal assistant, 37 her Photoshop subscription, 38 and her project management software. 39 She also deducts costs required for customer acquisition, 40 such as paying for social media ads 41 or purchasing a booth at a trade show. 42 Finally, the total expenses are subtracted 43 from the gross profit to give the net income 44 for the given time period. 45 Like you saw in Stephanie's example, 46 an income statement clearly and simply 47 breaks down your sales, cost of goods sold, 48 and expenses over a given time period. 49 Here are some easy equations you can use 50 when looking at your income statement, 51 and these equations can also be found 52 in our lesson seven guide. 53 Now, there are also times when your income statement 54 will include unexpected or unusual expenses. 55 For instance, let's say Stephanie 56 had to make a massive computer purchase 57 that only happens once every four years. 58 In that case, her income statement 59 will have an additional section for non-operating expenses 60 and her operating income, which is how much she made 61 before the odd expense. 62 This is shown separately from her net income, 63 which is how much she ended up making. 64 Separating these one-time expenses this way 65 can help you prevent panic 66 because if your income is especially low one period, 67 you can clearly see that it was from an unusual expense 68 and not a deeper issue with your sales or regular spending. 69 So how does reading an income statement help you? 70 Well, probably most importantly, it tells you exactly 71 how much you'll see in your bank account 72 when all is said and done. 73 This is what allows you to clearly see 74 if you're really making money to survive. 75 In our example, if Stephanie continued earning 76 and spending about the same for the rest of the year, 77 she'd make a healthy $60,000 in sales, 78 but she'd only end up with $33,000 after expenses. 79 So she would need to determine 80 whether or not that would be the right amount for her 81 to continue with her current business model. 82 When you look at your income statement, 83 you'll want to think about your net income 84 and determine if you're making what you're worth. 85 I highly recommend that you set up a calendar reminder 86 and block out some time to review your income statement 87 at least once a quarter. 88 So what happens if your income statement 89 shows that you're not bringing home 90 what you're really worth? 91 This is when you need to analyze 92 what your income statement is telling you. 93 To help you dig into it, 94 I've put together some questions to ask yourself. 95 First, what are your biggest expenses? 96 Make a list of these 97 and figure out where can you cut things down. 98 Next, are your expenses actually pretty low, 99 but you're just not bringing in enough profit 100 to make up for them? 101 If so, make a list of ways you can increase your sales. 102 You should also think about whether 103 you should raise your prices. 104 Finally, has your income been growing, 105 shrinking, or staying the same over time? 106 Determine which factors are causing changes 107 and make a list of ways you can improve in those areas. 108 Once you start looking at your income statements 109 and really analyzing them over time, 110 you can also determine your growth trajectory. 111 This can help you make smart decisions 112 about all aspects of your business, 113 such as purchasing new equipment, 114 paying for advertisements, hiring new employees, 115 and developing new products or services. 116 Even knowing you have a positive growth trajectory 117 should be exciting enough for you to want to drill down 118 into your income statements. 119 To put it simply, understanding your income statement 120 can help you figure out how to make more money 121 while spending less. 122 So, make sure you take this time 123 to do this on a regular basis. 124 You owe it to yourself. 125 In our next lesson, 126 we'll take a close look at another important report, 127 balance sheets.
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