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Keep a close eye on profitability by tracking your income and expenses using your income statement (also known as profit and loss).
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You’ll want to review your income statement regularly, along with your balance sheet and cash flow statement, to track your performance and ensure that your business operations are healthy.
An income statement shows detailed information about your revenue and expenses over a specific period of time, like last month, last quarter, or last year. It’s known by a few different names—profit and loss, P&L, statement of income, and statement of operations (for nonprofits).
Your P&L’s bottom line—net profit or income—is the calculated difference between your revenue and your expenses (costs).
Simply put, your income statement shows at a glance whether your business is profitable.
If the net income number is positive, you were profitable during that period of time; if it’s negative, your business was operating at a loss, which is why it’s called a profit and loss statement.
Every income statement calculates net profit (also called income) with the following formula:
Net Profit = Revenue – Total Expenses
Revenue includes all your sales. Expenses include things like direct costs, salaries, leases, supplies, interest, and taxes.
For a full breakdown and explanation of each section of the income statement, check out our article on the LivePlan blog: How to Read and Understand Your Profit and Loss.
Regularly reviewing your income statement—also called income statement analysis—is important because it shows how well your company is operating.
Your bottom line net income is the most important number to track over time, but there are other valuable insights you can gain from regular analysis of your income statement.
For example, many income statements report a subtotal for gross margin (revenues minus direct costs), which can tell you if the costs to produce your product or service are too high.
Besides understanding how your business is performing now, forecasting your income statement will allow you to plan and understand your profitability in future months, which makes cash planning for your business easier.
An income statement includes revenue, expenses, and net income (or net loss). It shows how much money the business earned (revenue), how much it spent (expenses), and whether it made a profit or incurred a loss over a specific period. It provides insight into your business's financial performance.
A balance sheet shows your business's financial position at a specific point in time, listing assets, liabilities, and equity. An income statement, on the other hand, shows your business's financial performance over a period, detailing revenue, expenses, and profit or loss.
The balance sheet is a snapshot of what your business owns and owes, while the income statement tracks profitability over time.
