I know…I know I can hear all of you saying it right now – It took you long enough! Yes it’s that time! It’s time to look at your Income Statement!
Everyone is always so interested in their Income Statement. Those are usually the first questions that I get asked when mentoring – How do I fix my Income Statement or I’m really not sure what it’s telling me can you help me figure it out?
Before we go any further you need to know what an Income Statement is…it is a summary of how the business incurs its income and expenses resulting in a net income or loss for a specified period of time.
When running a business we are so fixated on how much money are we making and spending. Which is a good thing – but if we are going to talk about an Income Statement I want to make sure we are all talking about the same thing and that we are on the same page.
Here is where you see the effects all of your previous accounting decisions:
- Management Accounting or Financial Accounting
- Cash Basis or Accrual Basis
- Chart of Accounts set up
- Departmentalization or not
Simplified Income Statement:
If you have chosen Financial Accounting, Cash Basis, simplified Chart of Accounts and not to create Departments your Income Statement is going to be extremely simple to read. It will tell you what you made (Income), what you spent (Expenses) and what you have left over (Net Income/Net Loss).
As stated in my blog Profitability of Accounting – “Cash basis accounting is reactive. Cash basis does not allow you to prepare for what may be happening within your business until it’s too late.”
With a financial accounting/cash basis Income Statement you have to realize exactly what information you are receiving and read the statement accordingly. You personally need to know exactly what income and expenses you have visibility to – meaning that your Income Statement cannot be used a financial planning tool to move your business forward. This form of a statement tells you the amount of income you have actually received and expenses that have actually been paid.
This type of an Income Statement does not allow you to prepare for what may happen within your business.
Detailed Income Statement:
If you have chosen Management Accounting, Accrual Basis, in-depth Chart of Accounts and have created Departments, if done correctly, your Income Statement is going to be extremely detailed and informative to read. This form of an Income Statement will tell you what you made in each department (Income), expenses attributed to the production of goods and services in each department (Cost of Goods Sold), remaining funds left in each department (Gross Profit), what you spent (Expenses), and what you have left over (Net Income/Net Loss).
Once again as stated in my blog Profitability of Accounting – “Accrual basis accounting is proactive. Allowing for complete visibility to economic events regardless of when the exchange of cash occurs.”
With a management accounting/accrual basis Income Statement you also have to realize what information you are receiving and read the statement accordingly. You personally need to know exactly what income and expenses you have visibility to – meaning that a departmentalized Income Statement can be used as a powerful financial planning tool to move your business forward; providing you with current and future cash inflows/outflows.
This form of an Income Statement becomes an intricate part of your financial planning process. It will be referred to and printed on a regular basis. It provides a venue for aligning your income, cost of goods sold and gross profit for each department within your business; providing measurable metrics to create benchmarks.
Know that every accounting process decisions you make has a direct impact on the next decision and what will be available to you throughout the process. Know that each decision should not be taken lightly. Know that Applied Management Group is there to help you throughout the entire process with our mentoring and training programs. Allow us to help you create the Income Statement that works for you and your businesses future.
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