Income Statement Breakdown (Part 1): Revenue

Your business’ most basic numbers are revenue, expenses and profit and most people just pay attention to those. That might work at a basic level but “revenue minus expenses equals profit” is too simple. Business owners need to know how various expenses impact their business. In this 4-part series, we’ll break open the income statement so you can see how different elements work together and what each one means to you.

The first part of the income statement is the Revenue section. This is all the money that comes into your business. Gross Sales is counted here (which is all the money you get paid) and returns and discounts are taken off. At the end of this section is Net Sales.

So, if you take in $1,000,000 in sales over a period of time, but you give back $10,000 because people have returned items and you also give $15,000 in discounts, then the Revenues section of your income statement looks like this:

REVENUES

Gross sales: $1,000,000
Less returns: $10,000
Less discounts: $15,000

Net Sales: $975,000

When it comes to including returns and discounts, don’t make the mistake of simply writing a lower number in the Gross Sales line. You WANT to keep track of how much people are returning and how often you’re giving out discounts. This will help you find new opportunities in your business. For example, you might find that increasing another number (such as employee wages) might improve the quality of your products and diminish your returns; or you might find that increasing your sales or marketing expenses might decrease the discounts you give.  At the very least, you should use these numbers as goals and work at improving them each year.

This is Part 1 of 4 of your income statement. Check back next week to find more tips about the next part of your income statement.