Every month, you receive a set of financial statements that includes your income, balance sheet and cash flow statement. Like many business owners, you may be tempted to toss these aside or file them away without much more than a glance.
First, let’s quickly define what an income statement is, just to be sure that everyone is familiar with the same report. An income statement is also called a profit and loss statement (or a P&L report) or an earnings statement. It lists revenue, cost of goods sold, expenses and calculates the net profit based on these figures for a specified period.
Your income statement is a vital part of your business, playing a few critical roles as you plan and predict the direction your company is going:
The Predictor
An income statement is useful for investors and business owners as a way to determine trends and whether the company is going in the right direction in terms of both expenses and revenue. As a business owner, you may find that revenue is unexpectedly reduced in a particular month, leading you to reevaluate whether to make a new hire.
The Historian
Closely related to prediction, the historian can look at current and past income statements to determine whether the company is aligning well with objectives and goals. The income statement may help identify an expense that has suddenly spiked compared to previous months or income that is down when compared to the same month of other years, etc.
The Lender
Any time your business wants to finance new equipment or purchase real estate, the bank is going to ask to see your income statement. They will use your income statement, combined with other financial reports, to determine whether your expenses are under control, your revenue has been reliable and other factors that determine credit exposure. Positive trends in your income statement tend to attract lenders, while a negative trend may raise concerns among creditors.
The Tax Planner
Your income statement plays an important role in determining how much of your income is taxable. When you accurately capture your revenue and expenses, you will be able to estimate your tax liability, making it easier to minimize your tax obligations and eliminate unforeseen tax payments.
If you’re surprised to find that your income statement fills all of these important roles, you may decide that it’s time to be sure they are completed with accuracy. The Power CFO offers financial reporting to companies like yours, ensuring every decision is based on solid information. Contact us to learn more.
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