Your Income Statement – How It Informs Business Decisions
Business owners are perpetually faced with critical decisions that can have far-reaching effects on their business and its future. Clients have often lamented that they have no crystal ball to tell them whether and when to bring in new products or services, which projects to say no to in order to keep costs down, and whether their decisions will result in projects that are profitable for the company.
The best decisions are those that are based on accurate, timely data – data that comes from your financial statements. When business owners I work with learn how to read, interpret, and apply the information from their financials, they express how much confidence they’ve gained in their decision-making.
A much more reliable source than a crystal ball when it comes to decision-making and preparing for the future, financials should be your focus – specifically three statements which are foundational to decision-making: the income statement, balance sheet, and cash flow statement.
The income statement may also be referred to as the profit and loss statement or statement of earnings. It provides a snapshot of business revenues, expenses, and net income or loss for a specific period of time – data that is essential to effective decision-making. The following are three ways the income statement can be applied to inform your decisions.
- Assessing Profitability
Your income statement provides the data to examine key metrics like net income, gross profit margin, and operating profit margin. Positive net income and healthy profit margins demonstrate profitability. This information can be used to evaluate the overall financial health of the business.
- Identifying Revenue Sources
The revenue breakdown provided by your income statement enables you to analyze sources of revenue and understand which products and/or services contribute most to company income. The income statement provides an expense analysis which provides a breakdown of operating expenses and cost of goods sold (COGS). This data can be used to identify areas in which costs can be reduced and managed without compromising the quality of products or services, which can lead to increased profitability. And having Budget versus Actual comparisons will provide valuable feedback.
Other ways your income statement can be of value in decision making include:
- Comparative Analysis
- Budgeting and Forecasting
- Investment and Financing Decisions
- Liquidity Assessment
- Management Effectiveness
- Risk Management
- Benchmarking
The balance sheet and cash flow statement also provide data that is important to decision making. These two essential documents will be reviewed in upcoming blogs.
This type of Financial Intelligence is a primary focus of my work with individual clients and an example of the topics I’ve address in recent seminars I’ve conducted. These important tools enable owners to confidently dive into essential financials, interpret the data provided, and apply it to the decision-making process. This ability to decode your financials, along with your industry knowledge and strategic thinking, will empower you to make the most proactive and impactful decisions for your business. Contact me for a complimentary consultation to discuss your own financial documents, or to get information about a complimentary seminar for your company, clients, or colleagues.
