Yesterday I was chatting to a business owner who had been in business for a number of years, employs 5 people and confessed to me that they still didn’t really understand their accounts.
This business owner is by no means unique, I hear this so often amongst small business owners. But the fact is that unless you learn to love your numbers and get a basic understanding of how they are made up, your business will never grow to it’s full potential.
Can you imagine Richard Branson or Sheryl Sandberg saying that they don’t understand their income statement? They are not accountants but they have educated themselves and certainly know how to read their numbers.
At one point in their lives they would have known nothing about their numbers either. We all have to start somewhere, so I thought I would de-jargen the income statement to take you one step closer to becoming Richard or Sheryl.
Income Statement – (AKA profit and loss statement) is simply the income you have made from selling goods and services, minus the expenses you incurred to give you the profit you have earned.
(Listed in the order you will see them on your income statement.)
Revenue – Income you have earned from the sale of goods or services in that period.
Cost of Sales – These are the costs directly associated with the production of the goods or services you have sold in that period. i.e materials and labour to make the widgets you actually sold.
Gross Profit – Revenue minus Cost of Sales
Expenses – These are the costs of running the business and will typically include things like rent, stationary, salaries, marketing, selling costs etc.
Operating Profit – Gross Profit minus Expenses
Interest – interest on loans
Profit before Tax – Operating Profit minus Interest
Income Tax – the tax you have to pay on the profit you have made, that your lovely accountant will have calculated for you.
Net Profit – Profit before Tax minus Income Tax your business owed.
As well as being a Chartered Management Accountant (CIMA) and ex-CFO with over 20 years experience, she has also worked extensively with small and medium sized business owners to help them grow profitable businesses.
She's also a certified coach, NLP practitioner, Metadynamics TM Consultant and contributor for Kochie’s Business Builders.
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