Small Business Blog

How to Take Your Income Statement to the Next Level

Make your Income Statement (Profit & Loss Statement) more valuable! This is simple, logical and direct advice that any business owner should listen to. However, ‘how to’ achieve this is perceived by many in small business as anything but simple. In fact, this is not for the most part even true, most people don’t even consider that their Income Statement can or should be more valuable or how this could be beneficial, let alone ‘how to’ achieve improvement. It doesn’t have to be so challenging or confusing, and ignorance is costly.

Taking the Income Statement to a more valuable level

Getting the basics right is great. Strong financial fundamentals and financial mastery will pay dividends. But if you have already laid your solid financial foundations through understanding your Gross Profit Margin, you’ll want to learn how to gain a deeper level of financial understanding. It’s time to make your income statement more valuable.

To take your Income Statement to the next level there is one very simple thing you can do; split your total revenue, cost of sales & gross profit into groups. I like to call them Revenue Activities (RA’s).

Revenue Activity Group

Most small businesses sell more than one product or service. Most can, and should, group their products and services into different ‘revenue activities’ (RA's). I normally recommend between 2 and 5 revenue activities. Of course you could further split this into sub groups for even greater detail. Retail businesses that have good point of sale (POS) and inventory systems can do this easily however, many small businesses do not have a POS, so what could this look like in business?

E.g. let’s consider a Automotive dealership, they could group their business’ revenue into 3 different activities;

• RA1 - Sales (vehicle sales)
• RA2 - Service (the vehicle services workshop / garage)
• RA3 - Parts (vehicle parts only sales)

If you review the Income Statement with a total of Revenue, Cost of Sales & Gross Profit, you would only get an overview of the total business’ performance. What any manager or owner (no matter how big or small the business) needs to know is which revenue activity group is contributing the lion’s share of revenue, costs & profits. To do this simply, the Income Statement should reflect this information.

A Simple ‘Before’ Example:

A ‘More Useful’ Income Statement Example:

With this level of detail we can now see that “RA2 – Services” as a revenue activity, while only contributing to 30% of total sales revenue, contributes a massive 50% of all gross profits because of a huge 66.7% gross profit margin percentage vs “RA1 – Sales” with only 20% GPM%. Such information is vital to make quality business decisions about where to focus your efforts.

Action Points

Can you improve the quality of information available to you in your financial statements? You can almost always improve. Better information, leads to better decisions, leads to better results.

• Either speak with your bookkeeper or accounting system installer / software company provider or DIY or get a member of your team to become responsible for doing this, however you to it… get it done! Start basic and you can progressively get further advanced over a period of time.