Reading an Income Statement

An, income, statement, covers, a, period:, a, quarter,, a, year., It, answers, one, question., Did, this, business, make, money, during, that, time?, It, reads, top, to, bottom., Each, step, removes, a, different, kind, of, cost., That’s, why, there’s, more, than, one, profit, figure,, and, they’re, not, interchangeable.

Revenue, (or, sales), is, the, value, of, what, was, sold., Subtract, cost, of, goods, sold., This, is, the, direct, cost, of, producing, what, was, sold., Now, you, have, gross, profit., Gross, profit, answers, this:, Does, the, core, product, make, money, before, we, run, a, company, around, it?

Next,, subtract, operating, expenses:, salaries,, rent,, marketing,, admin., You, get, operating, profit., This, tells, you, if, the, business, as, a, whole, works,, before, financing, and, tax., It’s, usually, the, most, informative, single, line, for, comparing, two, firms., It, strips, out, choices, about, borrowing, and, jurisdiction, that, say, little, about, the, business, itself.

Now,, subtract, interest, and, then, tax., You, reach, net, profit., This, is, the, bottom, line,, what’s, actually, left, for, the, owners.

When, expressed, as, percentages, of, revenue,, these, figures, become, margins., A, 40%, gross, margin, means, 40, cents, of, every, revenue, dollar, survive, the, direct, costs., Margins, help, compare, businesses, of, different, sizes,, but, they, mean, nothing, in, isolation., A, 3%, net, margin, is, disastrous, for, a, software, company,, but, normal, for, a, supermarket., Any, margin, needs, a, benchmark, or, a, trend, beside, it.

One, thing, the, income, statement, does, not, tell, you, is, whether, cash, arrived., Revenue, is, recorded, when, it, is, earned,, not, when, it, is, paid., So,, a, business, can, report, a, healthy, profit, while, its, bank, balance, falls., That, gap, is, why, the, cash, flow, statement, exists., It's, the, most, common, misreading, of, this, statement.