The 1 Thing Your Income Statement Can’t Tell You
The income statement is one of three fundamental accounting reports. It is a periodic report, usually created monthly and shows all of your income and expenses in that month. If at the end of the period, you have more income than expenses, the result is a net profit. Yeah, you! If, however, you have more expenses, the result is a net loss. Not so good. Which is why this report is also commonly referred to as a Profit & Loss Statement.
Before we dig in, I want to clarify a few things.
The content of this article is for you if:
- you are a sole-proprietor or partnership
- your annual income is under 7 figures
- especially if your income is under 6 figures
- you have a real desire to improve your business hygiene™
The income statement is extremely useful to get an under-the-hood view of how your business is operating. Specifically, the report looks for signs of profit. Depending on your industry, your goal should be to have a profit margin of 25% or better (though it’s common for retail to have lower profit margins).
Now here’s the tricky part.
Business owners (just like you), get tripped up again and again because the income statement can’t tell you how much cash is available right now. The report will only show you your income and expense for the reported period, again, usually a month.
Why is this a problem?
You didn’t start a business to live like you did back in your college days eating ramen 6 days a week. You want a business that keeps you flush so you can have that bi-weekly massage and attend a retreat in Bali. Am I right? But, the reality is it is entirely possible for a business owner to have a profitable business and have no cash, nada, zero, zilch.
Here are a few ways this happens:
- credit card debt, when items are purchased the expense is reported in that period but the obligation to pay it back is a liability which will not be reported on the income statement
- using the business chequing account to buy personal expenses like clothes, groceries, etc
- assuming that cash = profit and using that to pay yourself, ignoring liability obligations such as sales tax and payroll taxes.
Businesses struggle because of this.
Income statement = period of time (i.e. month)
Balance sheet = specific point in time (i.e. date).
10 things you can do now to change your money ways
If you are already in business and know you don’t have any profit this month, I imagine you are probably wondering what needs to be done to get your cash flowing easily and abundantly back into your bank account. Here are some good business hygiene principals you can take to improve your cash position.
- Keep your business chequing account 100% separate from your personal shopping
- Ensure your bookkeeping is current
- Review your income statement chequing for profitability
- Eliminate any and all expenses that are not absolutely necessary
- Review your debt, determine what the payments would need to be in order to eliminate all debt within 3 years or less.
- Raise your rates, many business owners undervalue their services which leaves opportunity for profit on the table
- Open a savings account for sales and payroll taxes and consistently move the amount you will owe to this account. It is not your money. It never was. These are funds you hold in trust for the government.
- Open a savings account for your business income tax and consistently save between 20 – 30% of your net income
- Figure out the minimum monthly amount necessary to cover all of your recurring expenses and payments and never let your business chequing account fall below that amount.
- Start saving 1- 5% for future business investments.
Now let me ask you this, are you tired of trying to make ends meet? Are sick of feeling like you’re not making progress? And are you ready to get that weight lifted off your shoulders?
If that sounds like you, I want you to contact me for a financial strategy session. In it, we review your current cash situation and come up with an actionable plan to make your business profitable. The result? You in control of your cash.