Quick Tip #9: Structuring Income Statements

Ou team at Next Level Solutions emphasizes the importance of understanding your income statement’s structure. This key financial document not only reflects your company’s performance but also provides the data you need to make strategic decisions.

The Basics of an Income Statement

At its core, an income statement is organized into three primary sections:

1. Revenue: The income generated from what you charge customers.
2. Variable Expenses: Costs that fluctuate with sales, often referred to as Cost of Goods Sold (COGS).
3. Fixed Expenses: Overhead costs that remain consistent, such as rent, utilities, or salaries.

Revenue and Variable Expenses

Revenue is more than just a total—it’s a roadmap to understanding how different product lines or services perform. Paired with variable expenses, you can calculate your gross margin (revenue minus variable expenses), which is a critical indicator of profitability.

Think of variable expenses as a faucet that turns on when sales happen. These costs—like materials or labor directly tied to production—occur only when you’re selling something.

Fixed Expenses and Net Profit

Fixed expenses, or overhead, come out of your gross margin to determine your net profit. Understanding this fixed expense “bucket” is crucial for calculating your overhead rate. Separating fixed from variable expenses allows you to price products or services effectively and build accurate customer estimates.

The Value of Historical Data

Good historical data is your foundation for improvement. When you consistently track and analyze your income statement, you can identify trends, manage costs, and make informed decisions to drive growth.

At Next Level Solutions, we believe a well-structured income statement is a powerful tool for any business owner. If you’re ready to dive deeper into your financials and use them to improve performance, we’re here to guide you every step of the way.