What does your income statement tell you.

What is an income statement (P&L), and what should you look for when reading it?

An income statement is a document that shows a company's financial performance over a specific period of time. It includes revenue, expenses, and net income. By understanding how to read and interpret an income statement, you can gain valuable insight into how a company is performing financially.

First, you need to know the accounts listed on the Income statement.

Accounts on the Income Statements are divided into the following accounting sections: Assets = things that have value to the business Liabilities = debts or obligations to others Equity = the money invested in the business by owners, or profits earned by owners Revenue (aka sales) = Items bought by customers for resale at a profit Expenses Costs of doing business.

There are several key metrics to look for when reading an income statement, including gross margin, operating margin, and net profit margin. By understanding these metrics, you can better understand how successful a company is in generating profits.

We are going to concentrate on four key revenue, expenses, and profit terms which help you understand how much cash is being generated, what expenses are impacting profit, and where that profit is coming from.

Revenue and Gross Margin:

• Revenue: is one of the first figures you will see on an income statement, it is the total earnings generated by a company over a specific period. Revenue is calculated as the difference between how much money a company made from its products or services, minus any returns or discounts to those customers. It can also be found as the sum of all sales less cost of goods sold. The higher the percentage, the more efficient your company's operations were at turning revenue into profit. Remember that if expenses are too high compared to the revenue it could result in losses for that quarter or year. This means that either something's wrong with your business model and/or management needs to step up their game!
• Gross Margin: is another metric to keep an eye out for, which is often referred to as "profit before overhead". It represents the percentage of total revenue that a company retains after factoring in the direct costs. In other words, it's your revenue minus the cost of goods sold (the cost associated with making a product). For example, if you made $100,000 in revenue and the cost of goods sold was $60,000, your gross margin would be $40,000. The higher this percentage is, the more money a company will have available to cover overhead expenses like rent or utilities.

Operating and Net margin:

• Operating margin: comes in second in importance. This is the difference between how much money a company's operations made after taking out operating expenses, such as salaries and utilities. Comparing this figure to revenue can give you an idea of how much money was available to your business after paying for things like overhead. Depending on the industry, the operating margin may be used interchangeably with pre-tax income or EBIT (operating earnings before interest and taxes).
• Net profit margin: Net profit margin is another critical number that you should consider when evaluating whether or not a business is successful at turning revenue into profits. It shows how efficiently a company uses its assets to generate earnings, calculated by net income divided by total sales over a specific time period. Again, leaving this number in the red may not be a good sign for your business.

Keep these metrics in mind next time you read an income statement and don't forget to consider other factors such as net cash flow or earnings per share when making any decisions about a company's future! 

I hope this article was helpful for people searching for information on how to read an income statement.  If you have questions or need clarification, feel free to post a comment below!