SCORE Small Business Blog

Finance: Understanding an Income Statement

Organize Your Income to Gain a Profit

An income statement is the breakdown of your income and expenses.

Understand your sales, all the income and the expenses going out.

Most companies will recognize the revenue at the time of the sale of the products or services when the order is taken, or when the product or service is delivered. If a company has a hard time collecting their receivables then this revenue can not be realized until the money is deposited in the bank.

The same with expenses, depreciation and amortization. If the industry standard is depreciating an asset over 10 years but if it is depreciated over 30 years then the company will look more profitable.

Always know there is a lot of accounting discretion and must look at how aggressive or conservative you choose to present the company. Your accountant can help with the best strategy.

In general, expenses should be a percentage of revenue. Always look for trends. Revenue growth should always outpace expense growth.

As a rule of thumb, administrative expenses could be 20% of all revenue however each industry could have different standards which need to be looked at.

For Business statistics and financial ratios or or have your accountant help with the analysis of industry standards compared to other companies.

The bottom line is always the profit margin. Revenue minus expenses, including all the costs, of goods, labor and overhead expenses will equal your profit.

If your business is not profitable then changes need to be made to become profitable. Understanding where all the income is coming from will be invaluable in having and keeping a successful and profitable business.

Julie BranderBusiness Mentor, SCORE New Haven
Julie has been a SCORE volunteer since 1997. She has 20 years of experience in business, starting a manufacturing, wholesale and retail jewelry company. After selling her business, she dedicated herself to helping other entrepreneurs start and expand their business. | @juliebrander | More from Julie

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