5 Tips About the Income Statement

I’m amazed at how often someone looks at their company’s income statement and immediately zeroes in on the bottom line; the net profit. Of course, the net profit is important, but if you stop there you will miss some useful information that can be obtained from this statement. Here are 5 tips about the income statement.

Patterns and Trends

It helps to dig into the individual lines on the income statement. For example, suppose you are a distributor. Take a look at the cost of goods sold and ask some questions. Is it staying pretty much the same as a percentage of sales or is it increasing or decreasing as a percentage of sales? Likewise, do the same thing with other line items such as advertising, marketing, etc. You are looking for patterns or trends that indicate you are either staying stagnant, your expenses are growing disproportionally, or your expenses are trending down as a percentage of sales. Of course, some things, like rent, we would expect to decline as a percentage of sales if sales are growing. But some things where we might expect the same to occur may in fact be growing too fast.

Manageable Growth

As you examine the growth of your company is it at a pace where your financial resources will be sufficient to support this level of growth? If not, do you need to slow the growth or obtain additional capital to support it?

Errors

Occasionally you will see a particular expense item that seems out of line in regards to historical levels or budgeted amounts. This is variance analysis and can help to detect faster growth than expected or even prompt you to dig deeper and perhaps find out that some expenses have been coded to the wrong accounts. Perhaps something was expensed that should have been capitalized. Of course, it works the other way as well. If an expense item seems unusually low that also warrants further analysis. This and patterns and trends are two of the 5 tips about the income statement where people can get offended easily, But, don’t let that stop you.

Sales Analysis

If you look at what is behind the sales number you can identify some helpful information. The details tell you what is selling well and what is not. You can also get a pretty good idea of products that are not being well received if there is an unanticipated level of customer returns.

Departmental Management Success

By looking at the total and individual expense items for different departments you can get an idea as to which managers have a handle on their expenses and which ones seem blind to what is occurring. This, by the way, is best used as a way to help get people back on track and train them on how to better manage, rather than making it a reason to jump all over someone who has missed a target.

How do you approach the income statement at your company? Are you just focusing on the net profit or are you using, among other things, these 5 tips about the income statement to help you better manage?

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As always, your comments are welcomed.

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