Your income statement is one of the most important financial documents your business needs to provide. But what is it, and how can you make creating this document easier for yourself and your business?
Here we take a look at everything you need to know about your profit loss statement, and offer you the chance to simplify it with a free income statement template. This will save you time and money when it comes to keeping your business’ finances up to date.
What is an income statement?
Your income statement is one of the three main financial documents which are used to detail the success of your business, along with your balance sheet and statement of cash flow. It is often also known as a profit and loss statement, or statement of revenue and expenses.
Income statements are usually prepared at different intervals throughout the financial year, helping you to track the progress of your business for a specific accounting period, such as a month or quarter. They are most commonly prepared monthly, then aggregated to produce results for each quarter and year. The period the income statement refers to is always detailed in the heading so you can easily see which accounting period you are looking at.
Why is your income statement important?
An income statement contains valuable financial information which you can use to analyze the performance of your business over the accounting period it refers to. Depending on the type and size of your business, you might be required to lodge annual profit and loss statements as part of your reporting to the IRS in the United States, HM Revenue & Customs in the UK, or the Australian Securities and Investments Commission (ASIC). This is something you will need to check in order to ensure your business is fulfilling its legal requirements.
No matter whether or not you are required to lodge a profit and loss statement, it is an extremely important document. Once it has been prepared, it can then be built into a complete financial model. This enables you to forecast future performance, which is essential for a number of reasons:
- Future performance enables you as a business owner to make better decisions about which direction to take your business in, and whether or not you are in a position to take risks;
- It gives your stakeholders a clear picture of the progress of the business;
- It can help you secure any finance you need, so your business can grow and increase its market share.
This is why all businesses need to prepare regular income statements, as this is the easiest way to keep track of your profits and losses.
What does your income statement include?
Your income statement focuses on two key areas: revenue and expenses. This enables you to work out the net income of your business by using the formula:
Net income = revenue – expenses
Revenue is the money your business has made during the accounting period covered by the income statement. It can be split into three key areas:
- Operating revenue – this is money made from the primary activity of your business, such as selling your products or services.
- Non-operating revenue – this is money made from secondary activities, such as rent from any properties your business owns, or interest on money you have in the bank.
- Gains – money made from other activities such as selling old company assets.
Expenses are amounts of money which your business has paid out during the accounting period covered by the income statement. These can also be split into three areas:
- Primary expenses – these are expenses incurred in the primary activity of your business, such as staff wages, utility bills, research and development.
- Secondary expenses – these are expenses related to your business but not to its primary activities, such as interest payments on a business loan you have taken out.
- Losses – these are expenses which cause your business to lose money, such as legal costs in a court case, or selling an asset at a loss.
Putting all these figures down in a complete profit and loss statement template gives you a comprehensive overall picture of your business finances. For a start, it enables you to work out the net income of your business, so it effectively shows you the health of your finances.
However, it also shows you the finer details which are essential for making sound business decisions. Your profit and loss statement can show you how competitive your business is against others in the same field, and how well you are using your available capital to increase your business activities. This information feeds into your major financial decisions, helping you to set realistic budgets and make wise investments so you can improve the success and profitability of your business.
What is not included in your income statement?
Your income statement is not a statement of cash flow. This means it does not include receipts or cash payments; in other words, money received or paid out by your business. There is a good reason for this: your income statement needs to refer to a particular accounting period, and your revenue and expenses have to balance. Payments and receipts are often not completed within the same period as each other, so they cannot be accounted for until they can balance.
As an example:
In January, your business spends $10,000 buying 100 stock items at $100 each, which it plans to sell on for $120 each. However, you only sell 20 of these items in January. This means you would only be able to include the expenditure for 20 items in your January accounts, in order to ensure that they balance. Therefore your cash payments for January would be $2,000 and your receipts would be $2,400.
You then sell the remaining 80 items in February, so you would have to show the expenditure for those in your February accounts, as well as the receipts. Your cash payments for February would therefore be $8,000, and your receipts would be $9,600.
It would be impractical to include receipts and cash payments in your income statements, as this disparity happens so regularly for most businesses. Perhaps the business does not sell off their stock within the same accounting period as the purchase. Maybe clients are late paying their invoices. Or it could be one of a wide range of other circumstances that can arise, any of which can mean that the accounts for that period do not balance. Figures should not be included in your profit and loss statement until your revenue and expenses can balance.
What does an income statement look like?
No two businesses’ income statements will look exactly the same, but the information they contain tends to be fairly similar. If you look at a profit and loss statement sample from any business, you can see the type of information most income statements contain, and yours will probably not look too different.
However, it is important not to use another company’s income statement as a profit loss template for your own business, as it will not be entirely appropriate for your individual needs.
How long does it take to complete a profit loss statement?
The length of time it takes to complete your income statement will depend entirely on the nature and size of your business. If you run a small business, you will be dealing with smaller amounts of money and a less varied range of activities than a large company would be, so your profit and loss statement will take less time.
However, this is still a significant activity which is usually undertaken by your bookkeeper or accountant if you have one, or the owner of the business if you are a small enterprise. It can take some time and experience to make sure you include everything and the figures balance. As this is a task you will usually have to complete every month, it can end up taking quite a considerable amount of time which could be spent on other areas of running your business.
It is extremely important, though, that you keep up to date with your income statements, as they form an essential part of your financial information, and offer you the insights you need to take the best decisions about the future direction of your business.
Make life easier with a free income statement template
If you find it difficult to complete your profit and loss statement, or you want to find a way to make the process quicker so you can free up more time to spend on other more enjoyable aspects of your business, help is available!
Billdu.com is an extremely easy and user-friendly way of staying on top of your business finances, via an intuitive mobile app and online dashboard. It offers all the tools you need to complete all your financial paperwork quickly and easily.
This means you can let Billdu do the hard work for you, while you can spend your time using your talents on the areas of your business you do best. Take the effort out of preparing your income statement by downloading this free profit loss template which we have prepared for you, by clicking here!
Download the free income statement (profit and loss) template
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