Why Do I Need to Read my Income Statement?
My bookkeeper asks me to review and approve the income statement each month. Why is this so important?
Whether you’re in the print packaging, label printing or wide-format sector, it’s essential to review your income statement every month, at minimum. Your income statement is part of a set of reports that tell you the cost of doing business. In fact, when it comes time to sell your business, you will need a clear picture of your financial situation, so you may as well start becoming educated today about these tools.
Many owners in the graphic arts industry think it’s enough to keep a mental tally of sales and expenses. They have a pretty good idea of gross sales and general overhead. They may have a scratch sheet with the cost of sales and some variable items. As far as really drilling down into their income statement, however, they rely on a CPA, business partner or spouse to review the “big” financial reports, like Year End. Often, they have the bookkeeper generate a monthly report “for the file,” but no one else checks it for mistakes or missing information.
I get it. You’re busy, not sitting at a desk reviewing reports. So you may think you don’t have time to go over the statement line by line. Make time. It’s that important. Schedule it on your calendar, and make sure your bookkeeper is available to answer questions.
Once you have it on your calendar and commit to this monthly process, make a list of things to look for when reviewing your income statement.
- On the first pass, highlight missing items, placeholder amounts that need to be entered, variable amounts that might have been brought forward but not updated, prepaid amounts, and obvious mistakes or red flags.This is when you will discover you may have been overpaying for something or booking an expense into the wrong category, especially line items that have tax ramifications. These may seem like minor errors, but they will throw off your projections and make budgeting more difficult next year.
- After everything is corrected, generate a final report.
- With a correct month-end statement in hand, start digging until you are satisfied you have gotten as much business intelligence as possible from the document.
Remember, your income statement can help you with strategic business planning, forecasting, projecting expenses, identifying cost savings, and improving bottom line profits.
A comparative income statement can help. A comparative income statement shows each item for the current month compared to: (1) the performance over the past three months, (2) the same period a year ago, (3) the corresponding line item on the budget, and (4) the percentage of change, up or down.
The income statement works in tandem with two other reports:
1. The balance sheet, which is a current picture of the owner’s equity.
2. The cash flow projection or report, also known as the cash flow, which shows how liquid the company is — or is projected to be — at any point in the month.
The income statement, balance sheet, and cash-flow projection can be generated at any point in the month. But in my opinion, the cash flow must be reviewed and acted upon daily.
Remember, it’s the owner’s obligation to look out for the best interests of the company. Performing the essential checks and balances is part of that obligation. If you were to experience embezzlement, for example, your monthly review shows your intent to implement procedural controls and adhere to best practices.
As you can see, your income statement is part of a mighty set of tools. In the hands of a shrewd business owner, you can leverage the insight from your income statement to build your success in the specialty print sector.
Check out other articles in my #AskRock series for more mini case studies and expert answers for the specialty print and converting industry.