An income statement is a financial statement which presents the business operations over time, usually a year. It shows how profitable (or not) a company is over this timeframe.
It is presented as revenue – expenses = profit or loss. If your revenue is greater than your expenses, you have a profit. If your expenses are greater than your revenue, you show a loss on this statement.
Revenue is generated when your business sells products or delivers services. Business expenses represent the costs of generating such revenue. These could be the rent for your office space, the interest on your loan, the salaries of your employees, or email software that you use to communicate with your customers. Hopefully, your revenues are greater than your expenses. Many new businesses, however, are prone to having a net loss – or more expenses than revenue – in the beginning.
An income statement shows whether the business has generated profits within a specific timeframe, so it is a historical presentation. It is also commonly known as the Profit and Loss Statement.
These financial statements are important for a business owner to understand. Timely preparation and review of these can help you determine situations like:
- Does your business have enough cash to operate (balance sheet) while you are generating losses (income statement)?
- Can your business generate enough cash from sales (income statement) to pay for the debt your business owes (balance sheet)?
- Does your business need to take out a loan to pay its employees and vendors, and if so, is it able to pay the interest and principal payments each month?
- If your business is profitable, are you able to withdraw a return on investment?
These questions help you as a business owner to understand where your business stands, so you can make decisions and continue to grow your business.