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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.

Income Statement
Company X
May 2011

Month Ended May  
Net Sales $18,875 100.0%
Cost of Goods Sold (6,500) 34.4%
Gross Profit $12,375 65.6%
Operating Expenses    
     Advertising $1,500 7.9%
     Bank Service Charges 120 0.6%
     Insurance Expenses 100 0.5%
Interest Expense 125 0.7%
     Legal & Accounting Fees 300 1.6%
     Office Expenses 250 1.3%
     Payroll Taxes Expenses 350 1.9%
     Postage Expenses 75 0.4%
     Rent Expenses 800 4.2%
     Salaries 3,500 18.5%
Supplies 300 1.6%
     Telephone Expenses 200 1.1%
     Utilities 255 1.4%
Total Operating Expenses $7,875 41.7%
Net Income $4,500 23.8%

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.

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