Examining Your Income Statement: How to Gauge for Business Profitability
If you run a small business, your ultimate goal is to attain business profitability that will make your business grow, expand, and flourish over time. But as you're generating income now, how can you tell that your business is making enough money, or if it’s really that profitable? The answer is to take a look at your income statement more than your bank balance.
In this article, we'll share with you what you need to examine in your income statement in order to gauge your business profitability. Keep on reading to see if you need to hire a small business accountant at this juncture.
What to check: Income Statement
In a nutshell, an income statement is one of your company's financial statements showing the revenues and expenses during a particular period of time. It also shows how the revenues are turned into the net income or profit. There are two parts included in an income statement, as follows:
Gross Profit: Typically found at the top of the income statement, this refers to the profit your business makes after deducting the costs involved with doing business. In short, it pertains to your revenue minus direct costs (costs associated with making and selling your products or services). A very good example is your retail store where you sell goods. Your gross profit is the income you generate from selling your goods minus all the expenses involved in producing and selling them.
Net Income: Typically found at the bottom of your income statement, this refers to your gross profit after deducting the overhead expenses (anything not associated with generating revenue. Some examples of overhead expenses include facility rent and utilities, repairs and maintenance, salaries and wages for office staff, and professional fees. They may not directly generate sales, but they are vital in the overall business operation. Without them, your business won't be fully operational.
If you're doing the accounting for your small business on your own and these concepts are quite confusing, it's best to hire a business accountant on the Gold Coast.
How to Tell If Your Business is Profitable
The biggest question is: how can you tell if your business is profitable? The answer to this lies in your income statement, particularly in your gross profit. For your small business to be considered profitable, it must generate enough gross profit, such as it is sufficient enough to cover all the overhead expenses.
It's true that most small businesses generate more revenue than direct costs. However, they do not necessarily generate enough profits after covering overhead expenses. This is what every small business should be wary of in order to achieve real business profitability.
Overall, accounting is paramount for any given company, particularly for small businesses. Taking a look at the income statement and examining your gross profit and net income can make a difference in determining the actual status of your company. From there, you'll see whether or not your business is indeed profitable. Ultimately, It's best to hire a small business accountant for your small business to help you accurately gauge your business profitability.
We are an accounting firm in Gold Coast that helps businesses reduce taxes and augment profits. If you're looking for a business accountant on the Gold Coast, get in touch with us today!