Income Statement : Three things you must monitor
What is an income statement?
It is one of the four main statements of any business which reports on the revenue earned and expenses incurred in a specific period. The difference between revenue and expenses gives us profit in its most basic form. The period can be a week, month, quarter, or year.
Why is the income statement important?
Most small businesses are “in business” to make profit, am I right? That’s what makes the income statement important; to show you, if your business is making profit or not.
How do I know if my business is doing well, other than making a profit?
Apart from monitoring if your business is making a profit or not, assessing the variance of profit compared to the budget. We have previously covered budgets.
What line items should you focus on as the owner?
We recommend focusing on three main categories to monitor:
Income
Without sales or revenue, there is no business. With most small businesses, as they start up, spending is more than income.
But, this must be monitored and at some point, income must exceed expenses, which results in profit.
Your income must be further broken down per product/service to allow you to assess the performance of each product/service.
This breakdown allows you to quickly pick up which products or services are not doing well when compared to the plans.
You can then concentrate your efforts on those products that are underperforming.
Decisions about whether to increase marketing for them or re-package them and even discontinue them must be made on information that your accountant can provide you with.
Expenses
If you sell products, these usually consist of expenses to make sales (cost of sales) and expenses to keep the business running (operating expenses)
It is important to keep expenses as low as possible to allow the business to carry on being profitable.
Usually, when a business is just starting out, there will inevitably be more expenses than income.
Losses should be monitored very closely to ensure that they do not continue for long periods of time.
Main expenses to monitor would be the cost of goods purchased, payroll expenses, administration costs
Taxes
This is a very technical item and you must consult with your accountant to make sure that you’re taking advantage of all the allowances that SARS affords to small businesses.
Each business is unique and the calculations will differ. If your tax is high, you must talk to your accountant to understand why and if there is anything that can be done to reduce the cost to your business.
After you deduct expenses from income, you pay taxes on what is left. Net profit is what is left after taxes are calculated.
How can we help?
We take advantage of technology to capture your business transactions in a timely manner. We use Xero because it is so easy to use and you have access to your company’s information at any time.
When you sign up for our affordable and value packed retainers, you get monthly reports of your business performance. We also provide advice where needed so that you make informed business decisions.
If you are still one to do things manually, here’s a template that you can use for your own business!
Free Income Statement Template – Income Statement | Xero CA
We have tailor made packages to suit every stage and we’re excited to get to work with you on your business!
Get in touch with us by sending an email to hello@santosbiz.co.za or Book a Call with us now.
