Earlier in the week we discussed a little bit about the first “B” in the BIC+B group of financial statements that every entrepreneur must know. Now that we’ve gotten some knowledge under our belts about the balance sheet we can now move on to the Income Statement. This financial statement is often referred to as a Profit & Loss Statement or P&L. It shows your revenues, expenses, and profit for a period of time. The period of time is your choice, but most utilize monthly, quarterly, or yearly. So, the easy equation would look something like this:
Income – Expenses= Profit or (Loss)
So in short the income statement measures your sales or revenues, costs or expenses and the difference (bottom line) which is your profit/loss for the period in question. This is regardless of if cash has been collected for a particular sale or not or if a check has been written for a particular expense.
The income statement is a great document for entrepreneurs to refer to in an effort to determine what proucts and services are profitable, what products to make as a focal point in marketing materials, which customers to pursue, etc.
Get in the Know Tip: Profit is an estimate and should not be confused with cash. For instance, your income statement could reflect that you’re making money, but you may not be collecting cash in a timely manner in which to pay your obligations. This is why so many small businesses may appear profitable on paper, but do not have enough money in the bank to keep the doors open.
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