Statement of income

We have already explained the cash flow statement and its importance in tracking the movement and variations of cash, and therefore knowing the real amount of money we can count on at any given time and in the future.

Now it is the turn of the income statement, or profit and loss statement as it is also known. This financial statement tracks the income and expenses of the business and shows us its profitability as a result. No matter the size or type of business, everyone needs to know if they are making a profit, or if they are making a loss, in order to set the course of the business and create their strategies wisely.

It shows what is happening, thanks to the information previously collected and recorded on sales and purchases, consumption, operating expenses and other important performance data. The fundamental thing is to analyze the reason for the expenses.

What is the income statement for?

This report shows how much you are generating in sales and also how much, where and on what you are spending the money. Its importance lies in being able to analyze and interpret the information. It allows us to:

• To see the amount of sales and income for the month and if they are enough to cover the monthly expenses. If more money is coming in than going out.
• Better appreciate the profitability of the company by calculating the different margins (gross and profit) of your business.

• Optimize your available resources.

• Show where the money is being spent and the amounts. Follow up on them, decide if you really need to spend a certain amount, if you can save on some management.

• Indicate the best way to distribute dividends (if applicable), since they depend on the profits that the business is able to produce in that period.

• Look at each income and each expense over several months and identify trends. Even over time, compare the data with previous periods and detect strengths and weaknesses in operations.

• Compare our profit margins with those of other businesses in our industry. Determine whether our results (whether positive or negative) are far from or close to what is expected, according to the current market situation.

In other words, determine precisely what aspect you can improve to obtain a profit month after month and an annual net profit that exceeds the previous one. To know if we are making a profit or if we are in danger and need to cut costs.

What does the income statement contain?

Fundamentally the income statement is about taking the income from sales, subtracting all expenses and adding other income earned (not from sales) to arrive at the final result which is the profit or loss. This is done through a series of accounts that allow us to know about sales and the management of all expenses, including costs, operating expenses, taxes, interest and commissions:

• In summary the report is shaped from revenues, costs and expenses.
• The header indicates data such as the name of the business, title of the report and the period it collects.

The main accounts are:

• Sales: Sales revenue is shown.

• Cost of sales (or variable): Indicates what it cost to make, sell and distribute the goods (products/services).

• Profit or gross margin: is the result of subtracting the cost of sales from the sales revenue. It is the amount you have obtained (either profit or loss) without deducting other expenses.

• Operating or administrative expenses: indicates the fixed expenses, generally monthly, that are necessary for the maintenance of the business, e.g. utilities, rent of commercial space, insurance, etcetera.

• Operating profit: the result of subtracting operating expenses from gross profit.

• Financial expenses: corresponds to expenses that are not directly related to the purchase and sale operations, but to the use of external financing (loans) and bank commissions, e.g. commissions and interest.