How to Read an Income Statement

There are three types of financial statements for your business: income statement, balance sheet and statement of cash flows. 

These financial statements help you see the health of your business finances and even the health of your business. 

Let’s learn how to read each of these statements: income statement, balance sheet, statement of cash flows

The Income Statement

The income statement looks at your revenue and your expenses. 

How much money did you actually make from your sales in the time period you are looking at? How much money did you spend during the time period you are looking at? 

Most income statements are viewed on a 1 month basis. But you can also look at them on a quarterly basis, a yearly basis or even a comparison basis (we’ll look at that later in this post). 

The income statement is the statement that you really can’t ignore and usually the one that most business owners only pay attention to. 

If you only look at the income statement in your business, you will be mostly fine. 

What does an income statement look like? 

This is an example of a basic income statement.

For most online businesses, you will not have the line cost of goods sold. Don't worry about that.

How do you read this statement? 

It is really pretty simple. You just read it line by line.

The revenues can be broken out by each of the different ways that you bring money in or it can be all grouped into one lump sum. The only person/entity who actually cares about the grouping of the revenues is you as the business owner.

The expenses are then split out by each line item and this report shows the total amount for the month (or other time period) that you spent for that type of expense.

And lastly, the total revenue minus the total expenses equals your net profit (or loss).

The income tax expense is going to be your net profit multiplied by what you choose to save for your income taxes and pay for your estimated taxes.

What is comparison basis view? 

Comparison basis view is usually when you compare the current period or month to either the same period or month of the previous year or the previous one. 

For example, you are currently looking at May 2020 for your income statement. The comparison basis view means you could be looking at May 2019 or April 2020 to compare. 

Most comparison basis views look at the prior year. In your business, you really want to see how much you have improved the current month over this same month last year. 

But as online business owners, the months don’t always compare the same way as they do for brick and mortar businesses. 

This view is really just so you can see how much change you have made in the current period from a previous period. You should see growth in the current period over the prior period almost every single time. 

What about those percentages that you see on an income statement, what do they mean? 

When you see the percentages on an income statement, like this one right here, what do they mean? 

The percentages simply mean how much each line item is of the total revenue. 

For example, look at the example above. (You can ignore the columns for 2010 and 2009 in that example.)

The total revenue (net sales) is always 100%. Then each of the other items is a percentage of the total revenue.

Understanding Your Income Statement

Your income statement is simply telling you how much revenue you brought into your business and how much money you spent in your business for the time period you have selected. 

This tells you the net profit or loss you had for the time period. 

The ultimate goal is to have a net profit, but that doesn’t always happen. The more you look at and understand your income statement, the more you can create a net profit, though. 

Any questions? Anything still confusing?

Leave a Comment: