Are You Making Any Money? Useful Calculations for Your Business
Question: Recently, I had a question about what a balance sheet shows, so I thought I’d tackle income statements as well.
Answer: The income statement is also known as a profit and loss statement, or a P&L. It shows what you have earned and what you have spent to produce a profit (or a loss) over a period of time. It provides the answer to the question, “Are you making any money?”
The income statement begins with the income from operations, which is your revenue from the sale of items, and then reveals your cost of goods sold (COGS), which are the expenses directly related to that which was sold. In our industry, the most common COGS categories are the product costs and freight.
- Income - cost of goods sold = gross profit
- Gross profit divided by income = gross profit percentage
Gross profit percentage is a useful number to monitor. It shows the portion of sales you are paying to the supplier. In our industry, 40% is an industry benchmark, meaning 60% is being paid to the supplier. You can control this by how much you charge your customers for items sold or how much you pay your suppliers and shippers.
Operating expenses follow gross profit. These are your costs of doing business not directly related to your sales, such as telephone expenses, insurance, payroll and utilities. Once these are deducted (subtracted) from your gross profit, you have net income (or loss)—your bottom line.
- Income - cost of goods sold= gross profit
- Gross Profit minus Operating Expenses = Net Income
In managing your business, your P&L gives you the information to review and adjust your business operations. It allows you to calculate the impact of increasing sales, or reducing your cost of goods sold, or reducing your operating expenses to increase net income.
Please email accounting questions you would like considered for the column to HGatter@AccountingSupportLLC.com with the subject line of "Ask the Accountant."
Harriet Gatter, owner of Accounting Support LLC, was an ad specialty distributor for 23 years and an adjunct professor of accounting at Neumann University. She sold her ad specialty business in 2012, became certified as a QuickBooks ProAdvisor, and now works exclusively with ad specialty distributors nationwide on their QuickBooks, order management and accounting needs.