The income statement
First, understand that the income statement is based on this equation:
Income – Expenses = Net Profit / Loss.
Understanding the income statement
 A profit and loss statement
 Reports the earnings of a company and the incurred expenses while
generating that income
 Reveals a business’s cash generating ability
 As a scorecard, it reflects where expenses are incurred vs where sales
are made
 Includes revenue, capital (depreciation), expenses, and cost of goods
 It does not show when expenses are paid or when revenue is collected
(unlike a cash flow statement)
 It does show projected profitability of the business over a specific time
frame
How often should you generate an income statement?
To assist in the business planning process, the income statement should be
generated on a monthly basis during year one, quarterly in year two and
annually from the third year.
NOTE: Not all businesses are the same, and this will be reflected in your
income statement. For example, service businesses will include supplies and
spare parts under inventory, but nothing under manufacture or resale. On the
other hand, retailers and wholesalers account for their resale inventory under
cost of sales, which refers to the total price paid for goods during the
accounting period, including freight and delivery.
bizconnect.standardbank.co.za
List your financial projections based on the following:
Income. This includes all income generated by the business
Cost of goods. This includes all costs related to the sale of
products in inventory
Gross profit margin. This can be expressed in rands, as a
percentage, or both, and is the difference between revenue
and cost of goods. As a percentage, the GP margin is always
stated as a percentage of revenue
Operating expenses. This includes all operational overhead
and labour expenses
Total expenses. The sum of operating expenses and cost of
goods
Net profit. The net income depicts the business’s debt and
capital capabilities and is the difference between gross profit
margin and total expenses
Depreciation. The decrease in value of capital assets used to
generate income. Also used as an indicator of the flow of
money into new capital and as the basis for a tax deduction
Earnings before interest and taxes. Shows the capacity
of a business to repay its obligations
Interest. This includes all short-term and long-term interest
payable for debts
Taxes. This includes all taxes on the business
Net profit after taxes. Shows the company’s real bottom line
bizconnect.standardbank.co.za