INCOME STATEMENT DEEP DIVE
A few weeks ago we dug into what financial statements are. Today we’re going to go a bit deeper into the first of the “big 3” – Income Statements.
Income Statements (also called profit/loss statements) essentially show you your revenue & expenses, and resulting profit, in a specific time period. You’ll mainly see these for a month, or for the year.
REVENUE
There are a few different types of revenue that show up on the income statement.
Sales
This is the easy one that we all think of. It’s the products or services that we sell to our customers. REMEMBER THOUGH – these sales are entered based on when you invoice them, not when they get paid. If you sell online where payment is taken when a purchase is made, then those dates are one in the same. But, if you send invoices to customers and they send you payment, that payment could arrive next week, next month, or (gulp) longer than that! (Note to self, you may want to drop those customers).
Generally speaking, you want those payment dates to be a month or less. You’ll be delivering/providing that service and so need to get compensated. The longer it takes to get payment, the longer you have to fund or finance that customers product/service. You’re not a bank, so don’t take this on any more or longer than you have to.
Interest
Pennies count! Interest is those little micro deposits that the bank makes to your accounts for holding money in there. On the revenue side, interest is good! You hold money in savings or investment accounts and banks thank you for letting them use your money with giving you 1.5%-2.5% interest on whatever balances are there. If you have your money in investment accounts (i.e. GIC, TFSA, RRSP, LMNOP), you’ll likely earn a better interest (3%-12%)– but you could also lose money, so don’t do this as a quick money grab. Most investments are long-term for a reason; so that you can ride out the low’s with (hopefully) more high’s.
Grants & Subsidies
Remember the world of wage subsidies? If you qualified for them in covid, they were the BEST for struggling businesses. Generally, subsidies and grants are from governments looking to support some specific priority or need. There are things like the Youth Wage Subsidies, to support hiring new workers; Exporting Grants to support efforts to get your products beyond Canadian borders; or Digital Adoption Grants to support your business in becoming more tech savy.
There’s a ton of programs out there, you just have to find them. And once you do, you’ll have to write a proposal, create budgets, and if you get it, you’ll likely have some kind of reporting to the funders, as well as financial reporting. AKA – while its “free” money, you do have to work for it.
Sale of Assets
We’ll get into the whole world of assets (and liabilities) in another post, but assets are things you own that are useful longer than a year. Think of things like a computer, furniture, tools/machines…you get the idea. If you decide to sell one of these things – say a sewing machine, cause you are getting a new one – the money you make from this sale needs to be reported. If “on paper” your old sewing machine was worth $50, but you sold it for $75, that extra $25 that you made would be reported as income.
EXPENSES
Expenses are the things you spend money on. Again, like with revenue, what matters is when you buy something, not when you pay for it. Unlike revenue, you want to prolong payments to their due dates so that you can use your money as long as you can before it gets sent to others. If a supplier is going to give you “NET30” on an invoice, take it! “NET30” basically just means that the invoice is due 30 days after it was issued. So an invoice dated Feb 15th that is NET30, would be due Mar 15th.
In terms of “what” is an expense, you’ll want to include costs related to:
Producing your product /delivering your service
Wages, contractors, professional fees
Office supplies, rent, utilities, phone, internet
Marketing, travel, subscriptions
There are lots. If you want a full rundown of what expenses you should be tracking, download 101 Expenses you need to be tracking for your creative business.
PROFIT
Profit is what’s left over. You sell; you spend; you get (hopefully) profit.
Now the important thing to ALWAYS REMEMBER:
PROFIT does not equal BANK BALANCE
Unless you receive payment and pay bills the moment you get them, and you don’t use any credit cards, personal money, or loans/lines of credit, your bank balance will never look like your PROFIT number.
Why? Well because the reality is that you don’t/won’t pay every bill the second you get it. You will definitely have payments go through on a credit card or a personal account. And you will likely have sales that aren’t paid instantaneously.
AND to top all that off, there will be money in and money out that won’t show up on your income statement – it gets recorded on your balance sheet. For example, remember that new sewing machine we talked about above? Well, that doesn’t show up on your income statement cause it’s an asset; the money still comes out of your account, but it won’t be counted as an expense. Same with transferring money between accounts – if you move money from a savings account over to your main chequing account to cover some bills, that money isn’t considered “revenue”; we only see it move on your balance sheet, but your bank account definitely gets that boost.
SO WHAT?
Great, so now you know what makes up an income statement, but what can you actually do with it or learn from it?
First, it tells you what you have to pay taxes on. If you have a 10K profit, you’ll be paying taxes on 10K; a 5K loss (aka -$5000), you’ll be paying nothing. This is a good number to watch to know how much you need to be putting away for taxes at the end of the year.
If you’re a sole prop, you need to save 25-40% for income taxes; if you’re a corp, you’ll want to do 15% (in Alberta – reach out if you want to know the tax rates for other provinces).
Second, you can see what your Gross Profit and Overhead Costs are. Gross Profit is basically your “pre-profit”. It is Revenue minus your Cost of Goods Sold (COGS). These are the variable costs that you spend in order to produce your product or deliver your service (go download that freebie for more deets). These are costs that, if you didn’t sell a single thing, they would be zero. For example, if I didn’t have any bookkeeping clients, I wouldn’t have any QBO subscription costs – this is a variable cost/COGS.
Overhead Costs, on the other hand, are the things you pay for whether you sell something or not. These would be things like rent, subscriptions, phone, or wages.
When you look at your Gross Profit, this is the amount that you have left over to cover all your overhead costs.
In the example here, gross profit is $175K; fortunately the expenses are $142K so we’re left with [NET] Profit of 33K.
When looking at these numbers (besides going cross-eyed), what you want to think about is whether your gross profit is covering your overhead. If not, you’ll need to do some digging:
Am I charging enough?
Am I selling enough?
Can I find supplies/materials/services for a cheaper price?
Can I make better use of the supplies/materials/services that I have?
Is my overhead out of whack? What can I cut to streamline things here? What’s wasteful? What’s nice to have but not necessary?
Did I make your brain hurt?? If so, I’m sorry. It can be intimidating, but I’ve got your back. Reach out if you have questions!