Learn about the accounting report known as the income statement, also called the “profit and loss statement.” It not only details your startup’s income and expenses over a specific period, but also reveals your business’s profitability. From sales to operating costs and net income, understanding each aspect gives you a clear picture of your company’s financial health and equips you to make strategic decisions that drive its growth.
Income Statement
This accounting report reflects a startup’s income and expenses over a period, making it an essential component of financial management and determining its net profit or loss. It is also called a “profit and loss statement” or “P&L.”
Key Line Items in an Income Statement
- Sales: Revenue represents the funds generated from selling products or services.
- Cost of Sales (COGS): Expenses directly related to production or sales. In English, “Cost Of Goods Sold”.
- Gross Profit: Revenue minus costs, showing the profit generated by products or services.
- Operating Expenses (OPEX): General costs of running the company. These may include sales, marketing, G&A (general and administrative expenses), and depreciation/amortization.
- Operating Income: Gross profit minus operating expenses.
- Financial Expenses: Interest or commission expenses.
- Pre-Tax Income: Operating income minus financial expenses.
- Income Tax: Tax paid to the government.
- Net Income: Final profit or loss after subtracting operating and financial expenses and taxes.
Key Aspects of the Income Statement
Related to sales:
It is essential to understand the nature of revenue (recurring, long-term contract terms, etc.).
Projected revenue growth over time, as well as the drivers behind that growth (PxQ).
Related to expenses:
Understand the distinction between costs and expenses. This is essential for reporting gross profit. Costs are expenditures the startup incurs to generate revenue, while expenses include expenditures that are not part of the business’s “core” but are necessary for its day-to-day operations, such as administrative salaries, rent, and other items.
Analyzing the Income Statement
A good income statement is only half the job. The other half is being able to analyze it and make decisions based on it.
That’s why we present below the different types of margins you can calculate when analyzing your income statement to give investors greater confidence.