SPOTLIGHT BUSINESS Demystifying Your Income Statement Learn what it all means and how it’s set up. By Noel Flynn any sign of that changing. We can add financial statements to the list of inevitables, which already includes death and taxes! Why do intelligent owners and managers still struggle with basic financial stuff? T At least one of the reasons is that there is a certain mystique surrounding account- ing. It’s a bit like the medical world where doctors and nurses appear to speak in tongues when discussing medical conditions, etc. Obviously, terminology has a lot to do with it. And like so many other things in life, sometimes those who are the most knowledgeable about a topic are actually the worst individuals to explain the subject matter to us mere mortals. Two Types of Accounting As business owners or managers, most of us only need to have a good grasp of what’s called “managerial accounting,” which is internally focused. However, if you intend to make your living as a CPA, then you need to study “financial accounting” (externally focused), which includes debits, credits and other accounting mumbo jumbo terms. With this in mind, let’s see if we can translate some of that managerial accounting stuff into concepts and applications that we non-accountants can understand and apply. There are two primary financial statements used to measure the performance of a business: balance sheet and income statement, aka profit and loss statement, or P&L. (A third, statement of cash flows, will not be covered in this article.) We’ll use a sports analogy that can help explain these two primary financial statements. The Income Statement: A One-Season Scorecard An income statement is a one-year scorecard, sort of like one season for a football team. At the end of each season, we can see the team’s performance for the 16 reg- ular games. But for the next/new season, we hit the reset button, and the perfor- mance scoring begins all over again. Your business generates an income statement for each month of the year, plus a cumulative set of numbers for any past monthly 24 KEYNOTES APRIL 2021 his is the 20th article in our “Tools for Managing Your Business” series. Many individuals — especially those who are new to business ownership or management roles — tend to struggle with understanding financial statements. Whether we like it or not, this is how the world keeps score in the game of business, and there isn’t numbers of that same year. Thus, we say that an income statement (or P&L) tells us what happened for a period of time, which could be one month (each game), several months (several games) or one year (the full season). So, we could have a P&L for only the month of March, or one for the first quar- ter of the year (three months combined), or for the entire fiscal (financial) year of, let’s say, 2020. This last one would com- monly be known as a December, year- to-date (YTD) P&L. The period of time represented by a P&L is indicated on top in the header. Pay attention to this so you know what period of time is covered. A common layout for the top/heading of an income statement for, say, March, for example, would include two side-by- side sets (columns) of numbers. One set representing the period, or in our exam- ple, only the month of March. The other (second column) set of numbers is for year-to-date (YTD) which represents the cumulative numbers for however many months of this year are covered. In our example, since this is the March P&L, the YTD numbers would be for the first quarter or the first three months of the year (January + February + March). Such a P&L would be formatted some- thing like what you see in Figure 1. This typical header format enables us to look at the company’s performance for WWW.ALOA.ORG
