Income Statement Snapshot

When you read your Income Statement (Profit and Loss Statement) what is your process? Do you just look to see if you made a profit? Try digging a little deeper.

The Big Picture

In the post Balance Sheet | A Different Look we took a look at how we first examine a balance sheet from an overall perspective, much like we look at a family photo. As this is done certain items will invariably jump out at you. Again, this is much like an individual in a family photo draws you attention. When it comes to the income statement the same process can be followed. First, get an overall feel for the statement and think about some of the relationships. Just like the balance sheet, eventually certain items will catch your eye.

Details

Also in the posting about the balance sheet we took a look at how individual items on the balance sheet had to be examined. The same should occur when examining your income statement. What strengths and weaknesses do individual items present? To do this it is frequently necessary to look at previous months to get a sense of how things are changing. Is your revenue growing? If so it is generally thought of as a healthy sign. However, the downside can be cash shortages if receivables are not collected in time to pay your vendors. This is one of the primary reasons to focus on controlling your growth. Two things that come to mind immediately are new products or services to introduce and expanding your customer base. Timing these correctly can make the difference as to whether you have adequate cash. Yes, pursue growth, but keep in mind growth that too fast can get your company in trouble just as easily as flat or slightly declining sales.

Take a look at some of your individual expenses. Are they reasonable for your company and industry? A word of caution is in order here – don’t get caught in the trap that an expense item should be a consistent percentage of revenue. Yes, something like commissions may work that way, but you can generally grow significantly without increasing such thinks as rent or even payroll expense. That is why it is important to have someone dig into the details of an expense item to look for waste or unjustifiable increases. Any expense item can grow unexpectedly. For instance, I once had a client who had begun to show a loss almost every month, whereas in the past the business had been profitable most months. As I analyzed the income statement it became obvious that the biggest contributor to the losses was a growth in the number of employees, yet sales were remaining flat. This was a relatively easy thing to correct, although painful for employees who lost a job. However, they never should have lost a job as the business simply could not justify hiring them in the first place. I touch more on this in the blog Things Financial Analysis Can Tell You.

What is Your Process

Do you have a process to thoroughly examine your income statement on a monthly basis? If not you are begging for trouble. By having a process to thoroughly analyze the income statement as well as the balance sheet you not only avoid potential problems, you also will uncover hidden opportunities.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

Share

Leave a Reply

Enter your email address:

Delivered by FeedBurner