XYZ Company Income Statement (For the year (12 months) ended December 31, 2018) (For December 2018) Revenue/Income: Income/Revenue Less Cost of Sales Gross Profit Gross Margin $100,000 $-50,000 $50,000 50% $1,000,000 $-600,000 $400,000 40% Expenses: (individual expense amounts have been consolidated into the Total Expense number ***) Payroll/wages, Payroll taxes, Benefits, Insurance, Rent, Utilities, Phone, Travel, Marketing, Internet, Vehicle expense, Depreciation *** Less Total Expense Net Income/Profit (B4txs) _________________________________________________________________ $-20,000 $-350,000 $30,000 Figure 2. Businesses need both monthly and year-to-date income statements. The amount of your invoice to the customer would hope- fully offset all of those direct costs and include sufficient Gross Profit leſt over to help cover your overhead expenses related to running the business at large. Your Total Gross Profit (for all income/sales) will need to pay for indirect expenses, with acceptable Net Profit leſt over. Although it varies by indus- try, a good general target for many small businesses is 40% Gross Margin. Remember, in our scenario just mentioned, you have not made a 40% profit at this juncture. That 40% Gross Margin ($400,000 Gross Profit — see Figure 1) must be sufficient to cover all the remaining general (indirect) costs of running your business and leave enough Net Profit to compensate the owner(s) for the risk and investment involved in own- ing the business. Recognize Our Indirect Expenses Now that we have established our Gross Profit (and GM%), we need to list our Expenses. Typically, these will include payroll, payroll taxes, benefits, insurance, rent, utilities, phone, travel, marketing, internet, vehicle expense, depreciation… and the list goes on. Some companies will group these expenses into related sum- mary categories such as: Sales, General and Administrative, or SG&A. Irrespec- tive of how our expenses are grouped or sub-grouped, we must account for all of our remaining expenses, including depreciation. Now, let’s look at the format of our annual Income Statement, which covers the entire twelve-month fiscal year 2018 (Figure 1). WWW.ALOA.ORG At Year-End So, what happens to the Income Statement at the end of the year? Since the monthly Income Statement is a recap of activity for a one-month period, we must carry forward the numbers from each month into a year-to-date, cumulative presentation through year-end. At year-end, we “reset” and begin all over again with a new Income Statement for the new year. So we need a parking place for the results of the year just ended. That place is the Retained Earnings section of the Bal- ance Sheet, but we only capture essentially the financial bot- tom line results of the year just ended. Results from previous years are already there. A Football Analogy It may be instructive to think of the monthly Income State- ment as equivalent to one game in a sixteen-game football season, although we only have 12 months in the year. Aſter each game (month), think of our Income Statement as a score- board where our income is like our points scored, whereas our expenses are like the points scored by our opponent. If our points scored are greater than our opponents’ points scored, then we show a profit (a win). At the end of the season (end of the fiscal year), our performance rolls up into our cumu- lative record. In our business, as previously mentioned, our performance for the year rolls up into the Retained Earnings section of our Balance Sheet. We need both monthly and year-to-date income statements. Typically, the format will look something like Figure 2. Keep in mind that, unlike public companies, many small busi- ness owners are more interested in minimizing the company’s SEPTEMBER 2019 KEYNOTES 21 $50,000 (5 %) (For the 2018 fiscal year)
