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What Is The Income Statement And How Is It Useful For Business Owners?
Last time we took a quick look at three financial reports:
Balance sheet
Income statement
Statement of cash flows.We talked about how you should read/review each of these monthly like reading the financial GPS to your repair shop’s finances. How financially healthy is your shop?
Not-so-subtle hint, if you haven’t talked to your bookkeeper about the three reports, book an appointment with her today.
In this day and age, this is a bare minimum service that your bookkeeper should be providing for your business. Your bookkeeper should also be able to easily explain what each point on these reports mean specifically for your business.
We’re diving deeper into what an Income Statement is. You may want to take notes as you read along or print this out. Great, useful information coming your way…
Income statements show how much profit a business generated during a specific time slice. This includes the amount of expenses incurred while earning revenue.
Talk to your bookkeeper about the most effective interval for your specific situation.
Income statements are also known as a profit and loss statement (P & L) and can be called a statement of operations, statement of earnings, or statement of income.
Remember the income statement shows:
Revenues
Cost of goods sold
Expenses
Gains
LossesYou can also learn a great story from the income statement:
Is the business making money?
Are the products and services the right ones?
Are products and services priced correctly?
Do we know what our true direct costs are?
Do we have the right mix of clients?It does not show:
Cash receipts (money you receive)
Cash disbursements (money you pay out).The income statement shows how profitable your repair shop was during the previous month, quarter, and year.
This part of your financial road map is important because it is a clear snapshot of how healthy your shop is.
Let’s take a look at other users of the income statement.
Income statements are not only used by business owners. Others who also place
high importance on Income Statements and the information they show are:
Accountants
Bookkeepers
Current Investors
Prospective Investors
Banks and other LendersEach one of these people glean crucial information from this profit and loss statement.
Looking at the structure of an income statement it finds the net income of a business. This is described as total revenue minus total expenses.
Start from the gross income from revenue the business received and work from there to get to the net income. Depending upon how many different sources of revenue or expenses a shop may have this can involve a lot of figures.
Common income generating services may include:
Diagnostics
Alignment checks
Suspension
A/C and Heating
Oil changes
Brake jobs
Tire repair and replacement
Engine work
Transmission tuneups and repairsWith each of these services come their own specific expenses. You can see how valuable your bookkeeper is as she creates an accurate profit and loss statement.
Overhead is also listed in the expense side of the statement and examples of these expenses are:
Rent/mortgage
Advertising
Marketing
Office Supplies
Utility bills
Insurance
Depreciation of fixed assetsNot all of these may apply to your shop and there may be more overhead expenses which are not listed here.
Subtract the operating expenses from the gross income and you have a total known as your operating income. This may also be your net income if there are no other figures to factor into your shops finances.
We mentioned investors, banks, and lenders earlier. They, as the shop owner, use Income Statements for comparison from previous months, quarters, and/or fiscal years. With this information, you and they can better analyze if your shop is getting financially stronger.
When looking to buy, lease, or repair your equipment, these numbers are valuable to securing financing at the most attractive terms available.
We hope you have learned more about how an income statement is structured and the critical information it shows you. Sit down with your bookkeeper and let her teach you what your profit and loss statement says. That’s part of her job she enjoys because she wants you to have the full financial picture of your successful repair shop.
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