Accounting – 4 Tips for Analyzing an Income Statement
A business income statement, also known as statement of comprehensive income, is a deceptively simple financial statement to analyze. I say it’s simple because it’s just a list of all revenues minus the expenses to reveal the profits. To most business owners, analyzing an income statement is nothing more than deducting expenses from revenue, and this is where the deception comes in. You need to find out the relationship between the revenues and expenses and define their impacts in your business.
To do so, you need accounting skills. This is the reason it’s advisable to use a professional bookkeeping or accounting service in Singapore. Analyzing business financial statements is part of accounting, and unless you are an expert in accounting, it’s difficult to analyze an income statement effectively.
Analyze the source of business income
Find out if the sources of your business revenue make any sense. For example, if you run a cotton candy business and much of your income is sales from the county fair, then that’s okay. However, if your business income is “donations from friends,” it implies that your business has no strong source of income.
Analyze the expenses categories
Are the expenses categories logical? Most businesses have expenses categories such as rent, insurance, salaries and wages, taxes, and more. If any expense categories are missing, find out why and how is being paid.
You should also determine the huge expenses. This could be salaries or other expenses. Besides, you should also find out why your business is borrowing money, from whom, and if the interest rates are reasonable.
Create a common size statement
To prepare a common size statement, express each item in the income statement as a percentage of sales. You can use a spreadsheet or a piece of paper. Note that you cannot overstate the common size statement. It helps you to easily calculate all your business profit margins including gross profits and net profit. Besides, it clearly reveals how much each expense takes away from your profit.
Compile a year-to-year comparison statement
A year-to-year comparison statement will help you to compare income statements for various years. Such analysis will help you to understand how your business has been performing for the past few years. Besides, you can make significant estimates plan for future business growth effectively.
Analyzing your business income statement will help you understand the sources of your business income and evaluate them. Also, you can spot the huge expenses and find out how they can be minimized to optimize business profits.