The All Powerful Income Statement
Last week we dove into the Balance Sheet, which I am the first to admit is a bit of a snore (though very useful). This week we are going to take a look at arguably the most versatile financial report available (queue drum roll)…the Income Statement.
QB or Xero or whatever accounting software you are using is going to have a canned version of this report that focuses on your net income for the entire company. What is net income, you ask? Net Income is the profit you make from sales after paying all of your bills.
Looking at net income for the entire company has obvious uses and companies’ typically track this on a monthly basis as a pulse check for profitability.
Here is an example of a standard IS report from Xero:
But what makes the Income Statement special is its ability to be applied to segments and even single products to measure profitability. Want to know whether your light bulb department makes more than the garden department? The Income Statement can do that. Want to know whether sales of that moon moon t-shirt justify the high printing costs? The Income Statement can do that.
With careful collection of revenue and expense data, you can create an income statement for any product or division of your company. I have even produced income statements for sales personnel that show the cash they bring in less their travel and salary expenses. Even a sales superstar can put you in the red if their compensation and expense budget is too high.
Here are a couple examples to give you some inspiration for your next Income Statement:
Income Statement by Sales Team
Income Statement by Product
Poor cash flow management is one of the leading causes of small business failure. Money is fast going out but slow coming in, particularly for new businesses that are still building their customer base. Having a monthly budget is a first step to understanding your cash needs but you can go one step further with a daily cash flow projection.
This report uses your starting bank balance for the month and adds your anticipated bills and invoices to determine your working cash balance on a daily basis. If things are tight, knowing whether you will have enough receivables in by the date your rent is due can save you a bounced check.
You should be reviewing and updating this report throughout the month. Checking the report regularly against your paid bills will alert you quickly to anything that is past due and give you a heads up for potential low cash events.
If your business is repeatedly low on cash throughout the month, it is worth investigating the supplemental reports available in your accounting system. A collections report will show you the average number of days it takes for you to collect cash from an issued invoice. Speed up those collections and that will provide you with more working capital during the month.
Xero has a great Aged Receivables report that you can drill into for details. It can even be converted into chart form for those that prefer visuals:
On the flip side, an inventory turnover report will show you the average number of days you are holding inventory before it is sold. Inventory ties up valuable working capital. You want to keep your product on your shelves for as little time as possible. Analysing sales trends on a monthly and annual basis can help highlight changing inventory needs so you don’t over buy in the future.
Xero has a great Inventory Detail report that can be used to calculate Inventory Turnover and they are promising to add the ratios in a future release: