How To Read An Income Statement

How to read your Income Statement (otherwise known as a ‘Profit & Loss Statement’ or ‘Statement of Activity) so that you can make more profit!

One of the reasons business owners don’t want to do their bookkeeping is because they don’t know what to do with the numbers when they’re done. Can you relate?

Sure, it’s one thing to record your income and expenses for tax purposes but that’s not always very motivating when life gets busy during the year.

Let’s learn how to analyze your data so that you can figure out what’s going wrong/right in your business and MAKE MORE PROFIT! Check out my latest IGTV.

The Income Statement summarizes how much money came into your business and how much money went out.

The most important thing when reading this statement is COMPARISON. I like to compare my data in 3 ways:

  1. Month to month
  2. Where I am this year vs where I was this exact time last year
  3. My actual income and expenses vs what I budgeted and projected

It’s no good just looking at the data if you have nothing to compare it to.

INCOME:

Be specific when doing your bookkeeping. Break your income down according to revenue streams aka services vs products.

If you only have services: break it down according to your different clients or offers.

If you only sell products: break them down according to the different products you sell.

Which one is making you more money?

Remember to look at your income holistically too! Compare how much time each revenue stream takes you? What are your opportunity costs? Do you enjoy the work? Is it worth the money? etc.

Then, compare your total income to previous periods or what you had budgeted for. Was it more or less? Why?

EXPENSES:

Again, be specific when recording your expenses.

This is the section where you will see if there are places your business is losing money. Make sure each expense on your statement is helping you generate a profit or help your business grow. If it’s not? Let it go!

Compare how much money you spent this period vs other periods. Also compare it to what you had budgeted. Was it more or less? Why?

NET PROFIT OR LOSS:

Income – Expenses = Net Profit or Loss

If it’s a positive number, you’ve made more income than you’ve spent. Otherwise known as a profit. GOOD.

If it’s a negative number, you’ve spent more than you made. This is a loss. BAD.

Look at your net profit/loss and compare it to what you’ve budgeted for and other periods. What is the cause for the differences? What changes need to be made? Are you happy with your profit? How can you make more?

I really like to calculate various ratios and compare my numbers to industry averages. If you’d like to learn how to do this, check out our course here. We go through in-depth financial management and how to analyze your data so that you can GROW YOUR BUSINESS.

Personally, I don’t think looking at your statements is very helpful unless you’re budgeting as well. Our course goes through the entire budget process. I’ll teach you how to create one step by step and give you a plug-n-play template report to analyze your actual numbers each month compared to your budgeted figures. Start growing your business here!

Email me if you have any questions! I’ll be sharing more about how to read your balance sheet in my next post. Stay tuned!

Share:

More Posts

Get your Free Accounting Checklist!

Enter your email below to download your free accounting checklist!

Take the MYF Quiz!

Are you LOSING SLEEP wondering if you’re doing everything right? Take the quiz and know where to start!