Using an Income Statement to Make Business Decisions
6 of 10 in Series: The Essentials of Business Financial Statements
Many business owners find it easier to make business decisions and compare their income statement trends using percentages rather than the actual numbers. Calculating these percentages is easy — you simply divide each line item by Net Sales.
The following income statement shows a company’s percentage breakdown for one month.
|Cost of Goods Sold||(6,500)||34.4%|
|Bank Service Charges||120||0.6%|
|Legal & Accounting Fees||300||1.6%|
|Payroll Taxes Expenses||350||1.9%|
|Total Operating Expenses||$7,875||41.7%|
Looking at this percentage breakdown, you can see that the company had a gross profit of 65.6 percent, and its Cost of Goods Sold, at 34.4 percent, accounted for just over one-third of the revenue. If the prior month’s Cost of Goods Sold was only 32 percent, the business owner would need to find out why the cost of the goods used to make his product likely went up.
You may find it helpful to see how your income statement results compare to industry trends for similar businesses with similar revenues; this process is called benchmarking. By comparing results, you can find out if your costs and expenses are reasonable for the type of business you operate, and, you can identify areas with room to improve your profitability.
To find industry trends for businesses similar to yours with similar revenues, visit BizStats. To use the statistics tool on this Web site, you select the industry that best matches the one your business operates in. Then you enter your total business revenue, click Compute, and review the resulting average profitability and expense percentages for similar small businesses.