I am always amazed when a business or startup company owner claims that their business or company doesn’t need an income statement. Some business owners don’t even know what an income statement is.
This is not good for the progress of any company because the truth is that most potential investors will likely ask for this document first before they can feel comfortable investing in your company. Remember that alongside the cash flow statement and the balance sheet statement, an income statement is one of the three primary financial statements commonly used by companies and businesses.
What is an income statement?
An income statement, which is also called a profit and loss statement, is a financial document that is supposed to reveal a summary of your company’s expenses, revenues, losses, and profits within a specific period. In the best practice, it is mostly professional to do this on a quarterly or yearly basis.
Components of an income statement
1. Sales Revenues
This section which is usually displayed first at the top of the document is the total income that your company generated during a specified period, remember that it can be either quarterly or yearly. This section outlines the sources of income from your company’s operations which include the revenue and income from the sale of goods or services. The Revenues section mainly involves adding all the selling prices.
2. Cost of Goods Sold
The Cost of Goods Sold lists the direct costs it took your company to produce the goods or services that your business or company sells. I usually describe the Cost of Goods Sold as what it costs you to procure tool parts, raw materials, and labor.
3. Gross Profit or Margin
Your Gross Profit equals the subtraction of the Cost of Goods Sold from total or Sales Revenue. This is simply the profitability of your company and in most cases, investors are more interested in this.
4. Operating Expenses
Our company HighJobLink Limited like most other companies has expenses related to the selling or providing of services to our clients such as research expenses, salaries, advertising, office rent, and promotion costs or expenses. This section deals with other costs different from those included in the Cost of Goods Sold section even though they are also associated with the running of your business.
5. Operating Income or Profit
I just want to remind you that your company will still pay taxes but before the payment of taxes, the Operating income is calculated. This is simply done by the subtraction of your operating expenses from your gross profit.
6. Non-Operating Income and Expenses
There are bound to be some expenses that are not related to your core business operations. For instance HighJobLink Limited is an employment agency, we render services to both employers and job seekers. However, we still make revenue by placing third-party adverts on on website www.highjoblink.com. That is what this section accounts for and they may include interest income or expenses as well as gains from investments in third-party companies.
7. Income Before Taxes
The government never forgets to take its share of what our company makes as profit. Income before Taxes outlines your company’s profit or loss before sorting out taxes.
8. Income Tax Expense
Of course, the government will still take its share of our profit. The Income Tax Expense shows the income taxes that your company owes depending on all taxable incomes.
9. Net Income
We are now at the final stage of the income statement. The Net income is calculated by the subtraction of income tax expenses from your income before taxes. The Net income final result represents your company’s final profit or loss.
Frequently Asked Questions
Will investors be interested in a company’s income statement?
Yes. Your investors will be interested in your company’s income statement as it will help stakeholders and creditors assess the profitability and efficiency of your company or business.
How do you prepare a company income statement?
To provide insights into your company’s financial performance you can ask your company’s accountants to prepare the income statement. You can also hire an accounting firm or a freelancer to do the job for a fee.
Do small businesses need an income statement?
Yes of course. You might need a loan from banks later and before considering your loan requests, they will want to see your income record.
Do I have to report all business income?
You must report all income your business earned annually. Income/Profit and Loss Statement. Net Profit Margin earned by a business in connection with the company’s sales is subject to tax in Nigeria, so you must report all income your business makes.
