Your Business Income Statement Has a Few Surprises

Many small business owners take their financial statements and either put them on the back burner. This lack of attention can result in the business owner being caught in a cash flow crunch or worse waking up one day to ask “where has my money gone?”

Income Statements 

The income statement or profit and loss statement is like a report card showing how your business performed over a specific time period just like when we used to get quarterly report cards from elementary school. That time period can be whatever the business owner sets it as – daily, weekly, monthly, quarterly or annually.  The most common time is monthly and it simply shows the business’s revenue and expenses. Then net income is calculated to show if there was a profit or loss.

 What are Revenue, Expenses and Net Income?

So what are revenue, expenses and net income?  Revenue is simply any money brought into the business.  Typically, income comes from some type of sales for the business. Expenses are costs or what was paid out for time period to support the business functions like sales.  The expenses listed on the income statement are typically those allowed by the IRS for tax deductions. Then net income is the reflection of how the business handled the inflow of revenue versus the outflow of expenses for the time period.

 Negative Income Statements

Many startups will show a negative on this report until they start to generate enough sales to cover the startup expenses.  It is advised that a new entrepreneur really know how long he or she feels the business will be in the “red” so enough funding can be injected into the startup.

A fact that often trips up business owners is that just because the income statement shows a profit, there may not be a “real” profit meaning the business made money during that time period. That is because non-cash expenses like depreciation and amortization are included in this report which can result in you having cash flow but no profit.

If you have questions about your financial statements, feel free to contact Richard Proffer, business development specialist for University of Missouri Extension Small Business Technology & Development Center in Cape Girardeau County.  He can be reached at 573-243-3581 or profferrd@missouri.edu.