How to Analyze your Income Statement

How to Analyze your Income Statement
June 15, 2016 0 By QuickBooks Proadvisor Certified

How to Analyze your Income Statement aka Profit & Loss Reports

The ability to independently analyze your accounting reports is essential in running an upwardly mobile organization.  Taking the necessary time to review your financial statements, AR reports, AP reports, and other reports will make you a stronger business owner.  Becoming a strong business owner requires information about your business which is not just operational information it should also be financial information. Having financial information enables you to figure out where your business is headed and improvements you can make.  So many questions can be answered just by reviewing your financial reports.

Some business owners feel overwhelmed when presented with too much financial data.  The fear comes from not knowing how to read and analyze the information and owners believe it’s just easier to “run the business”.   In order to have a well rounded business you must have solid knowledge of every aspect of your business.  We will discuss how to analyze one of the most common financial report the income statement.  In case having issue with balance sheet preparation than call QuickBooks Support Number for help dial now toll free

Let’s understand the Profit & Loss Statement:

Income Statement (aka Profit & Loss Statement) – this financial statement collects information on income and expenses and ends with a profit figure or a loss figure.  Look below for example.

 

Income Statement

ABC Company

January 1, 2017-January 31, 2017

Income:                   $56,987 this figure represents all of the sales and other income that were made from Jan. 1st to Jan. 31st

Expenses:   the expenses listed below rent, telephone, cell phone, and salary are the total amounts paid for the month of Jan.

   Rent                     $1,500

   Telephone                 $ 40

   Cell Phone                $125

   Salary                   $15,987

  

Total Expenses:     $17,652 this figure represents all of the expenses added together

Net Income:          $39,335 this figures represents Income minus Total Expenses. 

               If income is less than expenses it would be a loss not a profit.

When analyzing your income statements I recommend you view reports that provide information on more than one month and also from previous year to current year.  Below you will find example of each. More help QuickBooks Payroll Contact Number will help you .

 

 

Profit & Loss

By Month

ABC Company

January 1, 2017-March 31, 2017

January                   February                 March

                                     Income:                                                       $56,987                   $17,234                   $34,261

                                     Expenses:

                                                                                         Rent                           $1,500                     $1,500                     $1,500

Telephone                    $ 40                          $40                          $40

Cell Phone                   $125                        $500                       $125

Salary                        $15,987                   $15,987                  $15,987

    Total Expenses:     $17,652                   $18,027                   $17,652

    Net Income:          $39,335                      -$793                   $16,609

The Profit & Loss Statement above shows the income and expense by month over a three month period January through March. 

When I review this simple Profit & Loss Statement there are a few things that stand out and a few questions I would ask.

  • A.      I notice the income in February drops significantly compared to January with an increase in March.  Why did the income drop in February?
  • B.      Is February trending to be a “slow” month? In order to determine this would be for ABC Company to review the last two years Income Statements for February. 
  • C.      If February is trending to be a “slow” month what other activities can we implement to increase income during this month?
  • D.      The income in February is 30% lower than income in January.  Why didn’t the salary or wage expense also decrease?  Was ABC Company overstaffed during this time?  
  • E.       The Cell Phone expense is pretty high in February.  ABC Company may want to review the bill to ensure they weren’t overcharged. 

Profit & Loss

Three Year Comparison 

ABC Company

January 2017                  January 2016                          January 2015

                                                          Income:                      $56,987                   $42,778                   $34,261

                                                          Expenses:

                                                                   Rent                    $1,500                     $1,275                     $1,110

                                                                   Telephone           $ 40                          $40                          $40

                                                                   Cell Phone           $125                        $125                       $125

                   Salary                 $15,987                   $10,987                  $10,987

 Total Expenses:                          $17,652                 $12,427                    $12,262

Net Income:                                $39,335                    $30,351                     $21,999

 

The Profit & Loss Statement above shows the income and expense for the month of January for the last three years.  

Some of the things that catch my eye are:

  • A.      There is a steady increase in income over the last three years.  If I didn’t already know why there was a steady increase, I would investigate.  Perhaps there are some marketing initiatives that have worked and you may need additional money for the marketing budget. 
  • B.      Annual rent increases are normal, but there may be a need to review the lease to make sure the increases are according to the lease. 
  • C.      The Phone and Cell Phone accounts look good.  I would be concerned that these amounts have not changed over a three year period. These accounts could be under a contract with a fixed monthly rate for a certain number of years. 
  • D.      In 2010 the Salary and Wage account increase by $5,000.  Verification of new hires should be complete if you have no idea why this account has increased.  I would also see if there is a legitimate reason for the increase due to the fact that the increase in Net Income doesn’t seem to justify the increase in Salary and Wages. 

Quick Analysis Tips

  • A simple rule of thumb is to look for “unusual fluctuations”. For example if you typically spend $200 a month in office supplies and all of a sudden the account is $400 and you’re not sure why highlight this account.  Ask questions.
  • Never wait too long to review your financial statements.
  • Take the time to investigate “unusual fluctuations”.
  • Accounting software like some QuickBooks version can print reports with percentages.  Sometimes dollar increases don’t tell the complete story.  You may need to also review percentage increases and decreases.  For example if you have an account that has a 75% increase that’s pretty significant.
  • Don’t allow the same person who prints the checks review the financial statements.  There should be a separation of duties in order to maintain financial integrity.

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