When looking at an income statement, these 7 questions are all that you need:
Before we jump in, a reminder on on what the income statement is.
Revenue - Cost of Goods Sold = Gross Profit
Gross Profit - Operating Expense = Operating Income
Operating Income - Non-Operating Income/Expense = Net Income
Now to the questions:
Revenue - Cost of Goods Sold = Gross Profit
Gross Profit - Operating Expense = Operating Income
Operating Income - Non-Operating Income/Expense = Net Income
Now to the questions:
• What did our revenue(sales) do?
If revenue isn’t growing, this is the first sign the business might be struggling.
But revenue growth that’s slower than your industry or the economy is also bad.
Understanding this trend is essential.
If revenue isn’t growing, this is the first sign the business might be struggling.
But revenue growth that’s slower than your industry or the economy is also bad.
Understanding this trend is essential.
• What product/service drove revenue growth?
Most companies have more than one product and/or service.
Understanding which drove revenue is important, because it helps you identify which aren’t doing well and need attention.
Most companies have more than one product and/or service.
Understanding which drove revenue is important, because it helps you identify which aren’t doing well and need attention.
• What did our gross margin do?
Gross Margin = Gross Profit / Revenue
When margins go down, that’s a sign cost of goods increased or your prices decreased.
This is one of the numbers I watch the closest on any income statement.
Gross Margin = Gross Profit / Revenue
When margins go down, that’s a sign cost of goods increased or your prices decreased.
This is one of the numbers I watch the closest on any income statement.
• Did Operating Expense go up or down relative to sales?
Operating Expenses are expenses needed to operate the business, but not directly related to a sale.
When revenue goes down, operating expenses should go down (but this is often difficult).
Operating Expenses are expenses needed to operate the business, but not directly related to a sale.
When revenue goes down, operating expenses should go down (but this is often difficult).
• How does this year compare to last?
Understanding the trends helps you understand the business.
Revenue up? That new salesperson is paying off.
Marketing expense up? Dig in to figure if you’re paying too much.
Understanding the trends helps you understand the business.
Revenue up? That new salesperson is paying off.
Marketing expense up? Dig in to figure if you’re paying too much.
• How do expenses look compared to budget?
Every company should create a budget. It helps remind you what your plan was at the beginning of the year.
When expenses get out of line with the budget, it’s important to dig in and understand why.
Every company should create a budget. It helps remind you what your plan was at the beginning of the year.
When expenses get out of line with the budget, it’s important to dig in and understand why.
• Why did the profit margin change?
Profit Margin = Net Profit / Revenue
Profit is the ultimate goal of business, so it’s important you have margins healthy enough to support the growth of the business.
Profit Margin = Net Profit / Revenue
Profit is the ultimate goal of business, so it’s important you have margins healthy enough to support the growth of the business.
Monitoring these items will help tell you when your company is healthy, but they're not all-inclusive.
Next week I'll post what to look for in the Balance Sheet and Statement of Cash Flows.
Next week I'll post what to look for in the Balance Sheet and Statement of Cash Flows.
If you're a business owner or leader and don't feel confident looking at a financial statement, my 2 week cohort will help you:
• decode financial statements
• understand what metrics to track
• speak confidently with others
Apply today: kurtishanni.com
• decode financial statements
• understand what metrics to track
• speak confidently with others
Apply today: kurtishanni.com
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