Key takeaways

  • A small business income statement helps the business see whether it’s operating at a profit or a loss
  • You can use a single-step or multi-step income statement formula, with single-step formulas typically used by smaller businesses
  • An income statement shows income and expenses over a period of time, while a balance sheet shows assets and liabilities on a specific date, such as the beginning of a year

A business income statement tracks the revenue and expenses of a company over a set period, showing whether they’re making or losing money. An income statement is also known as a profit and loss statement (P&L).

Companies need to track revenue and expenses for tax purposes, to get approved for business loans and to understand their financial health. Without records and financial documents, small business owners will have difficulty running a successful business.

A small business income statement shows key performance indicators, such as revenue and sales before taxes and business expenses over an established period. You can track monthly, quarterly or annual costs versus revenue to determine overall profits.

A business income statement can also be used internally to analyze trends. For instance, you may discover that the last quarter of the year is always busier than your first quarter. Comparing income statements over time allows stakeholders to forecast when they will have their most profitable months.

You can also use a business income statement to forecast future expenses by determining when costs are highest and lowest.

Do businesses need income statements?

A business income statement is the best way to track expenses over time and determine if its products or services are priced correctly for profit. What you learn from an income statement can show whether it’s time to cut costs, raise your prices or both.

Profit and loss data also ensures a business can compare net and gross revenue over a set period. If you only look at gross revenue without subtracting losses, you won’t have an accurate picture of what your business is actually bringing in.

Income statements enable businesses to see their cash flow throughout the year and identify seasonal trends. Also, if you need a small business loan or lines of credit at any point, a lender may request it. Financial records, like an income statement, are commonly requested loan documents for proof of revenue.

What’s the difference between an income statement and a balance sheet?

While a business income statement compares total revenue versus total expenses, a balance sheet is a snapshot of your liabilities, assets and equity. A balance sheet doesn’t track trends; it reveals if your assets and ownership are equal to or less than your current debts.

Income statement Balance sheet
Period A range, such as Jan. 1 to March 31. A single point in time, such as Jan. 1, 2023.
What’s reported Revenue and expenses. Asset, equity and liabilities.
Primary use To track revenue and expense trends and determine if you had a net profit or loss during a certain period. To determine if you currently have more assets than debts without taking into account performance trends.

Bankrate insight

A cash flow analysis is similar to a business income statement because it records inflows and outflows of cash over a set period of time. But the cash flow analysis considers revenue, credit and investments, while an income statement simply records total revenue and expenses. The income statement helps to see if the business is performing at a profit or a loss.

All business income statements should include similar items, whether for a small business or a large corporation. Each line item tracks data only during the predetermined reporting period. Here’s what is included in an income statement:

  • Revenue: The total money from sold products and/or services.
  • Expenses: The total money spent, including inventory, taxes and labor. Depending on how in-depth you want to be, expenses can be put into buckets or specifically detailed.
  • Cost of goods sold (COGS): COGS determines the labor, materials and other expenses associated with selling whatever generated the revenue.
  • Gross profits: Subtracting the COGS from the total revenue reveals the gross profit.
  • Operating expenses: These indirect costs often have their own line item on an income statement, including rent and legal fees.
  • Income: Subtracting operating expenses from your gross profit will give you a starting income figure.
  • Interest and tax charges: List any interest you pay on business loans and tax payments as expenses.
  • Net income: To determine your net income, subtract taxes and interest from your income figure.

Depending on the size and nature of your business, you may need a single-step income statement or a multi-step income statement. If you’re looking for a template, SCORE has a profit and loss projection. The Small Business Administration (SBA) also has an income statement example that can work well for your business.

Single-step income statement

Small businesses just starting out may find single-step income statements sufficient. This statement requires only a simple calculation to determine your profits and losses. It may also be appropriate for larger businesses with a single line of business and minimal overhead.

The equation for this type of income statement is:

Net income = (Revenues + Gains ) – (Expenses + Losses)

Single-step income statement example

Top Notch Software generated $100,000 in revenue over the last quarter and recently sold its business real estate property for $250,000. It spent $80,000 in business expenses, automation software, marketing and personnel. It also didn’t receive $5,000 of its accounts receivable.

Using the single-step formula, Top Notch Software’s income statement would look like:

($100,000 + $250,000) – ($80,000 + $5,000) = net income

$350,000 – $85,000 = $265,000 in net profit

Multi-step income statement

A multi-step business income statement is more complex. It separates expenses into operating and non-operating costs, shows types of revenue and often includes subtotals within revenue and cost categories. This type of income statement is appropriate for large companies or businesses with multiple revenue streams that could be independently thriving or failing.

Common equations used in a multi-step income statement are:

Gross profit = Net sales – Cost of goods sold

Operating income = Gross profit – Operating expenses

Net income = Operating income + Non-operating income

Multi-step income statement example

Let’s say that Top Notch Software generated $100,000 in revenue but needs to sort out its $80,000 in expenses. It spent about $30,000 in technical services and marketing to bring its software to market, which is its COGS. It also spent another $20,000 in technology upgrades to keep pace with current tech in its field.

Using the multi-step calculations:

  1. $100,000 in revenue – $30,000 COGS = $70,000 in gross profit
  2. $70,000 in gross profit – ($35,000 in operating + $20,000 in non-operating expenses) = $15,000 in operating income
  3. $15,000 in operating income + $250,000 in non-operating income = $265,000 in net income

The bottom line

A business income statement is useful for internal trend tracking and external proof of revenue. If you apply for a business loan, you’ll be grateful for reports showing your history of growth. The more detailed your small business income statement, the more you can learn about where you’re overspending and where your best revenue streams are.

  • Income statements report revenue and expenses, which ultimately reveal gains and losses. These four components tell a picture of financial health.

  • A typical business income statement includes revenue, operating costs, non-operating costs, cost of goods sold, taxes and interest charges and gross profits.

  • Businesses need an income statement to gauge whether the business is operating at a profit or a loss. The income statement can help the business make decisions about whether it needs to reduce costs or increase revenue in order to operate profitably. Another reason a business may need to produce an income statement is if they’re applying for financing, like a working capital loan. A lender typically will ask for financial documents to see whether a business can afford to take on additional debt.

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