What does an income statement tell you about your business?

It is not possible to get a complete picture of a company's finances based solely on a bank account balance. The bank account balance indicates how much money the company has available right now, but it doesn't tell whether the business has been profitable. The income statement, on the other hand, shows what constitutes the company's income, what kind of expenses are generated by operations, and whether the company has a profit or loss at the end of the financial year. Therefore, it is one of the most important tools for monitoring a company's finances.

A profit and loss statement helps to outline a company's financial situation over a longer period than a bank account balance alone. It can be used to track how the business is developing, how costs are changing, and how decisions made are reflected in the company's results. When the profit and loss statement is reviewed regularly, a clearer overall picture of the company's finances is formed, and it is easier to make decisions based on up-to-date information.

What is an income statement?

The income statement is one of a company's most important financial reports. It summarises a company's revenues and expenses over a specific period, which could be a month, a quarter, or an entire financial year. The purpose of the report is to show how the company's profit is generated and whether the business has been profitable or loss-making during the period under review.

Every company obliged to keep accounts must include a profit and loss account in its financial statements. Its content and structure are determined by the Accounting Act and the Accounting Decree, in order to present companies' results uniformly. In practice, there are two main models in use. For SMEs, the most common is the cost-element type profit and loss account, where costs are grouped into, for example, personnel expenses, purchases of materials and consumables, depreciation, and other operating expenses. In the functional type profit and loss account, costs are divided according to the function in which they arise, such as purchasing, manufacturing, sales, or administration. This model is more often used by larger companies.

Turnover indicates the volume of sales.

Revenue is one of the most important figures in the income statement. It indicates how much a company has sold in terms of products or services during the reporting period. Revenue is reported excluding value-added tax, and after deducting any discounts granted and other sales adjustments. Therefore, it reflects the sales from the company's core operations.

Growing revenue is usually a positive sign, but it's not yet possible to assess a company's profitability based on it alone. If expenses also grow strongly at the same time, the company's profit can weaken, even if sales increase. For example, revenue can grow by 20%, but if personnel, procurement, and other operating expenses grow more than that, the company may be left with less profit than before. Therefore, revenue should always be examined together with other figures in the income statement.

What do costs tell us?

The profit and loss account shows what the company's expenses consist of. Typical expense items include, for example, personnel expenses, premises expenses, purchases, marketing expenses, depreciation, and other business expenses. Monitoring these helps to understand how the company's operations are changing and where money is being spent.

It is advisable to review changes in expenditure regularly, rather than just at the time of the financial statements. For example, if marketing expenses increase without a corresponding increase in sales, it may be necessary to evaluate the effectiveness of the marketing. On the other hand, an increase in personnel costs could indicate that the company is recruiting more employees to support growth. Therefore, not all increases in expenditure are necessarily negative; the most important thing is to assess their impact on the business and profitability.

Operating profit and net profit for the financial year

Operating profit indicates how profitable a company's core business operations are. It is formed when operating revenues are reduced by operating expenses, depreciation, and any impairment losses. Operating profit does not include financial income, financial expenses, or taxes, which is why it is often used when assessing business profitability.

The financial year's result is calculated after operating profit. It also takes into account financial income, financial expenses, and taxes. The financial year's result indicates whether the company ultimately made a profit or loss. However, a single loss-making financial year does not always mean that the company's operations are in trouble. For example, investments or a growth phase can temporarily weaken the result. The company's profitability should be assessed over a longer period and not based on a single financial year.

What should you track on the income statement?

Following the income statement doesn't mean you need to know every line by heart. Reviewing a few key figures is often enough to get a good picture of the company's situation. Regular monitoring helps to notice changes in good time and provides an opportunity to react before they start to affect the company's finances more broadly.

Attention should be paid to at least the following points:

• Has revenue increased or decreased?
• How have costs changed?
• Is the business profitable?
• How has the result changed compared to the previous month or the last year?

Why can the income statement and bank balance show different results?

The result of the income statement and the company's bank account balance do not always match. The reason for this is the accrual basis of accounting. According to this principle, income and expenses are recorded for the period in which the goods or services were delivered or received. However, money may move before or after delivery.

This is why a company can make a profit, even if its bank account is temporarily low on funds. Conversely, a company's account might have a lot of money at the same time as the income statement shows a loss. Therefore, a company's finances should be monitored using both the income statement and the cash situation, as they tell different stories.

How often should one review the income statement?

Reviewing the income statement should not be left solely to the year-end financial statements. Monthly monitoring provides a good overview of how the business is developing and how decisions made are reflected in the company's finances. At the same time, any potential changes are noticed in good time, allowing for timely reactions.

Regular monitoring makes it easier for the company to plan and make decisions. When the company's financial development is known, it is easier to prepare for future investments, recruitment, or other changes.

The income statement is an important tool for managing a company.

The income statement is much more than a statutory report forming part of the financial statements. It helps to understand what constitutes the company's profit, how the business is developing, and what kind of impact the decisions made have on the company's finances. When the report is monitored regularly, a clear overall picture of the company's finances emerges.

However, the numbers alone don't always tell the whole story. An accountant helps interpret the income statement, understand the causes of changes, and what they mean for the company's operations. When the income statement is reviewed regularly with an accountant, decisions are based on up-to-date information, and it becomes easier to plan the company's finances for the future.