{"id":824,"date":"2022-01-24T10:11:25","date_gmt":"2022-01-24T15:11:25","guid":{"rendered":"https:\/\/murphybusiness.com\/blog\/?p=824"},"modified":"2025-05-30T02:38:26","modified_gmt":"2025-05-30T06:38:26","slug":"understanding-an-income-statement","status":"publish","type":"post","link":"https:\/\/murphybusiness.com\/blog\/understanding-an-income-statement\/","title":{"rendered":"Understanding an Income Statement"},"content":{"rendered":"

An income statement is one of the three essential financial statements that a business owner uses to keep an eye on their success. It summarizes the company\u2019s revenues and expenses over a specific period of time.<\/p>\n

\"Understanding<\/p>\n

Also known as a profit and loss statement, an income statement will show you how your \u201cbottom line\u201d is doing \u2014 that is, whether you made a profit or took a loss during that timeframe.<\/p>\n

If you are buying a business<\/a>, understanding the income statement will give you a good idea of the financial health of the company and show you how overall sales, costs, and profitability look.<\/p>\n

Sales Revenue<\/strong><\/h2>\n

The very top line of an income statement will show you the gross sales revenue for the period. That\u2019s the raw dollar amount of sales without any expenses removed. Gross revenue<\/a> is a good starting point because it shows you how much room you have to grow or improve profitability.<\/p>\n

Low revenues might mean that the business owner hasn\u2019t taken full advantage of the market. That could indicate a lot of growth opportunities, but you want to make sure you fully understand why the current owner hasn\u2019t grown the business, so you\u2019re aware of obstacles.<\/p>\n

High revenues often mean that you have great opportunities for profitability if you control costs. If you notice that you could improve the business processes, that\u2019s a good sign. However, be sure to do your due diligence into any roadblocks that could keep you from implementing the changes, such as uncooperative senior management.<\/p>\n

Cost of Goods Sold and Expenses<\/h2>\n

If the company sells physical products, there will be a line showing the cost to produce the goods. The cost of goods sold (COGS) is the first deduction from gross revenue. Revenue after the COGS is the gross income or gross profit.<\/p>\n

The gross profit helps you understand how efficient the business is in producing goods. However, it doesn\u2019t include overhead.<\/p>\n

After gross profit, you\u2019ll see line item expenses showing the operating expense during that reporting period. You\u2019ll see recurring expenses such as rent, marketing, and equipment upkeep. These operating costs will reduce the gross profit figure down to the operating income or operating profit.
\nOperating profit will let you know how the company fares after all internal costs are deducted. These are the costs that you, as a business owner, have direct control over.<\/p>\n

Pre-Tax and Post-Tax Profits<\/h2>\n

The final portion of the income statement will show you the pre-tax and post-tax profit.<\/p>\n

Most businesses have loans and are paying interest on those loans. The interest expense is deducted from the operating profit to give you the pre-tax profit. Finally, taxes are removed to provide you with the net income, which people refer to when they talk about \u201cthe bottom line.\u201d<\/p>\n

To get an accurate feel for the profitability of a business you\u2019re interested in buying, make sure you look at several income statements. Is the company showing an upward trend? Are costs under control? Are there any expenses that seem out of line for the industry?<\/p>\n

Knowing whether you can make a profit right away or will have to rescue a company from excessive costs and inefficiencies can help you decide what price to offer \u2014 or if you want to buy the business at all.<\/p>\n

Know Your Income Statements<\/h2>\n

Reviewing income statements is just one of the essential aspects of due diligence. You also need to see other financial information, such as the cash flow statement and balance sheet. You\u2019ll need to understand the industry and how the business is perceived in its local market.<\/p>\n

Finding the right business to buy is a lot of work. Fortunately, Murphy Business can help. We know how to match buyers with the right opportunities and help you find a business that fits your needs.<\/p>\n

Contact us<\/a> or find a local office<\/a> today to learn more!<\/p>\n","protected":false},"excerpt":{"rendered":"

An income statement is one of the three essential financial statements that a business owner uses to keep an eye on their success. It summarizes the company\u2019s revenues and expenses over a specific period of time. Also known as a profit and loss statement, an income statement will show you how your \u201cbottom line\u201d is … Continue reading “Understanding an Income Statement”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":825,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,30],"tags":[],"class_list":["post-824","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-consulting","category-small-business"],"yoast_head":"\nUnderstanding an Income Statement -<\/title>\n<meta name=\"description\" content=\"Understanding an Income Statement Business Consulting\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murphybusiness.com\/blog\/understanding-an-income-statement\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Understanding an Income Statement -\" \/>\n<meta property=\"og:description\" content=\"Understanding an Income Statement Business Consulting\" \/>\n<meta property=\"og:url\" content=\"https:\/\/murphybusiness.com\/blog\/understanding-an-income-statement\/\" \/>\n<meta property=\"og:site_name\" content=\"Blog - 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