Introduction: Why the Income Statement Matters
If you’re a small business owner, you’ve probably heard terms like “net income,” “COGS,” or “gross profit” thrown around. These all live on your income statement—one of the most important financial tools in your business. And no, you don’t need to be an accountant to understand it.
Whether you’re doing your own books or working with a bookkeeper or accountant, knowing how to read and use your income statement can help you:
- Make smarter financial decisions
- Spot problems before they get out of hand
- Price your services more effectively
- Understand how profitable your business actually is
In this guide, we’ll break down the income statement in plain language, show you how to use it, and give you real-world examples so you can take control of your bottom line.
What Is an Income Statement?
An income statement (also called a profit and loss statement or P&L) shows how much money your business made and spent over a period of time—usually a month, quarter, or year.
Think of it like this:
If your business were a movie, the income statement is the plot. It tells the story of how you earned revenue, what expenses you had, and what was left over in profit (or not).
Here’s a basic structure of an income statement:
- Revenue (Sales)
- Cost of Goods Sold (COGS)
- Gross Profit
- Operating Expenses
- Operating Income
- Other Income/Expenses
- Net Income (Profit)
Let’s break each one down.
1. Revenue: The Top Line
Revenue is the total amount your business earned from selling products or services.
- If you’re a consultant, it’s what you charge for your time.
- If you’re a contractor, it’s what your customers pay for a completed job.
Tip: Revenue is always listed at the top of the income statement, which is why people refer to it as “top-line income.”
2. Cost of Goods Sold (COGS)
- COGS is what it costs you to deliver your product or service.
- For a product-based business, that might include materials, packaging, and shipping.
For service-based businesses, it might include subcontractor fees, software you use for client work, or direct labor costs.
Formula:
Revenue – COGS = Gross Profit
This brings us to…
3. Gross Profit
Gross Profit tells you how much money you made after covering the direct costs of your products or services.
Example:
Let’s say you brought in $20,000 in revenue, and it cost you $8,000 to deliver the work. Your gross profit would be $12,000.
Gross Profit = $20,000 – $8,000 = $12,000
Your gross profit margin is also important. It shows how efficient your business is at delivering what you sell.
Gross Profit Margin = (Gross Profit / Revenue) x 100
($12,000 / $20,000) x 100 = 60%
That’s a strong margin for many service-based businesses.
4. Operating Expenses
These are the costs of running your business that aren’t directly tied to producing your product or service.
Common examples:
- Rent or home office expenses
- Marketing and advertising
- Software subscriptions
- Phone and internet
- Insurance
- Salaries or admin staff wages
These expenses are subtracted from gross profit to give you operating income.
5. Operating Income
Also known as EBIT (Earnings Before Interest and Taxes), operating income tells you how much you made after covering your basic operating costs.
Operating Income = Gross Profit – Operating Expenses
This number gives a good sense of your actual business performance, before things like taxes or interest payments muddy the waters.
6. Other Income and Expenses
This includes things that aren’t part of your day-to-day operations, such as:
- Interest income or expenses
- Loan payments
- One-time gains or losses (like selling old equipment)
These are factored in to get your final number:
7. Net Income (a.k.a. Your Bottom Line)
Net Income is what’s left after all costs, including taxes and interest, are accounted for. It’s the money your business actually made.
- Positive net income = you made a profit
- Negative net income = you operated at a loss
Tip: This is called the “bottom line” because it appears at the bottom of your income statement.
Real-World Example
Let’s say you run a small home renovation business. Here’s what your income statement might look like for the month of April:
| Category | Amount |
|---|---|
| Revenue | $25,000 |
| COGS (materials + subcontractors) | $10,000 |
| Gross Profit | $15,000 |
| Rent | $1,500 |
| Advertising | $1,000 |
| Insurance | $500 |
| Software Subscriptions | $300 |
| Salaries (Admin) | $2,200 |
| Total Operating Expenses | $5,500 |
| Operating Income | $9,500 |
| Loan Interest | $300 |
| Equipment Sale | +$500 |
| Net Income | $9,700 |
This means you made a net profit of $9,700 in April. Now you can ask better questions like:
- Can I afford to hire someone?
- Should I increase my prices?
- Are my marketing efforts paying off?
How to Use Your Income Statement (Even If You Hate Numbers)
You don’t need to analyze every line every week. But reviewing your income statement monthly or quarterly can:
- Show you trends (e.g., rising expenses, declining revenue)
- Help you set smart goals
- Make tax season way less stressful
- Give you clarity on whether your business is actually profitable
Pro Tip: If your revenue is growing but profits aren’t, your income statement will help you find the bottleneck.
Common Mistakes to Avoid
- Not reviewing it regularly – If you only look at your numbers once a year, you’re flying blind.
- Mixing personal and business expenses – This muddies the waters and distorts your true profitability.
- Ignoring COGS – Especially for service providers, ignoring direct costs makes you overestimate profits.
- Using cash instead of accrual accounting – If you do project work, accrual accounting gives a clearer picture of when revenue and expenses actually occur.
Quick Tips to Improve Your Bottom Line
- Increase your prices (even slightly)
- Cut unnecessary expenses (start with subscriptions)
- Track gross margin and aim to improve it
- Set revenue goals based on realistic expense forecasting
Conclusion: Know Your Numbers, Know Your Business
Your income statement isn’t just a report. It’s a map that shows you where you’ve been and where you’re going. Understanding it puts you in control of your business instead of guessing where the money went.
Whether you’re trying to increase profits, expand, or just keep things sustainable, the income statement is your best financial compass.
Need help decoding your income statement or setting up a system to track it monthly?
That’s what we do. Book a free discovery call to find out how we can support your business growth.
Understand your numbers today → Book your free strategy call with Apex Online Bookkeeping and start building a business that works for you.