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Grow Your Business Finances

What is an Income Statement?

cash-accrual-accounting-100712-02 Credit: Dreamstime

If your business is just getting started, you’ve got a lot going on, but taking the time to create an income statement is a good idea.

An income statement, also commonly referred to as a Profit and Loss statement, shows your business’s financial status during a given period of time.

Unlike a balance sheet , which shows you the business’s financial status at any given moment, the income statement allows you to see what’s happening over time. This will allow you to show your lenders, investors or managers exactly what’s happening financially at your company.

“An income statement should be started right off the bat,” said Luanne Mayorga, Manager of the Illinois International Trade Center at the College of DuPage in Lisle, Ill.  “As soon as you start keeping track of your income and expenses, you’ll be able to see how much money you’re going to need down the road.”

If you’re using a bookkeeping software program, you can easily create a customized income statement for any period of time you desire. Income statements can cover any period of time, but a longer period (at least a few months) can be most helpful because they allow you to see fluctuations in income and expenses.

If you are not using accounting software , then you will need to keep track of your income and expenses in an Excel spreadsheet.

The income statement should include your income before expenses and, following that, your expenses broken down into categories. Such categories might include: payroll, supplies, rent, loan payments, etc. The more detailed you get, the more likely you are to be able to analyze your income statement and determine where your business is overspending and could make cuts. It should also include depreciation and amortization of assets and taxes.

“Profit and loss (P&L) statements are critical,” said Fred Manuel, General Partner at Alliance Cost Containment in Ann Arbor, Mich.  “However, the P&L must also include details of each expense. That data should not be limited to general category expenses, but instead show each specific expenditure.” Manuel said that is the only way your business can examine the date to determine where you may need to become more efficient.

While that level of data may not be necessary to show to those outside the company, it is a good idea to keep of it for internal purposes, said Mayorga.

“In this economy, we have been seeing huge trend in people starting their own businesses out of desperation,” she said. “Not all of these people understand the financials or even the financial terms that they’ll be expected to know.” Mayorga said keeping track of your income and expenses is the most basic financial responsibility of a business owner and will help keep your business on the right track.

If you are not sure how to create an income statement, consult your accountant or you can take a basic business finance class at your local community college. You can also visit your local Small Business Development Center where they will help you for free.

Or, you can get free help from business professionals through SCORE, an association of experienced accountants and small business owners who volunteer to help new businesses. You can find a SCORE volunteer near you at the SCORE web site.

Jeanette Mulvey

Jeanette has been writing about business for more than 20 years. She has written about every kind of entrepreneur from hardware store owners to fashion designers. Previously she was a manager of internal communications for Home Depot. Her journalism career began in local newspapers. She has a degree in American Studies from Rutgers University. Follow her on Twitter @jeanettebnd.

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