The Income Statement: Are You Making Money?

income statementLet’s review. So far, we’ve discussed in this series on money that there are three important financial reports that every business owner should master. We’ve also discussed the first report, which is The Balance Sheet. Today we will learn about the second report: The Income Statement. This report goes by many names. It has been called the statement of earnings, the statement of operations, the income-and-expense statement, the profit-and-loss statement, or just the P&L. For our purposes, we'll refer to it as The Income Statement.  

Income and Expenses

This report has two basic parts: the Income Section and the Expense Section. At the bottom of this report, you will see the "Net Profit/Loss."  In other words, this reports tells you if you're making money or not. However, it doesn't tell you everything you need to know! If you look only at your company's income statement, you can think that you have money to spend when you really don't. This gap is sometimes confusing for business owners.

Do I Actually Have Money?

Let’s consider a few instances in which the report says you have money but you really don’t. One example is that you may have made sales – which will show up as "income" – but you may not have received payment for those sales, which we call receivables. Another example is that you may spend some of your cash on items that do not show up as "expenses," such as making a payment on the principal of an outstanding loan or making a "capital" expenditure. If you’re still unclear on this possible gap between the report and your reality, I encourage you to discuss this with your CPA. He/she can explain the accounting process and help you understand the difference between an "accrual-based" statement and a "cash-based" statement. Tweet This

Making Money vs. Having Money

The bottom line is this: The Income Statement is an abstraction. It's useful because it tells you if you are making money. However, it does NOT tell you if you have money in the bank!  The truth is that if your company is growing fast, you may be building up inventory, buying new equipment, opening up new offices/locations – in reality, you may be spending more cash than you are generating. Your Income Statement may show that your company is highly profitable, but you might be running out of cash! It is important to master your Income Statement. Know how to use it, but also know its limitations. As a business coach, I work hard to make sure my clients work closely with their CPA and know how to use this important financial report.

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