Income Statement Breakdown (Part 4): Finding the Bottom Line

We’ve been taking apart the income statement to help you better understand it and so that you can find money-saving, profit-increasing opportunities inside of it. This is the fourth and final step in the process and here we are getting close to the bottom line!

So far we’ve…

• Looked at Revenues and came away with Net Sales
• Looked at Cost of Goods Sold (either accrual or cash-based) and came away with Gross Profit
• Looked at Operating Expenses and came away with Net Profit

But those are not the only people who have their hand in the cash register! Let’s not forget banks and the government. In this fourth and final section of the income statement breakdown, we need to make sure they get their share.

Like the other sections, you add up the various expenses you have here and subtract it from Net Profit. This section is sometimes called “Non-Operating Expenses”. If you have shareholders, some of their payouts go here, too.

Now let’s look at this part of the income statement and we’ll compare how the accrual and cash-based system work so you can see both in action:

ACCRUAL EXAMPLE

NON-OPERATING EXPENSES

Interest: $10,000
Taxes: $40,000
Subtotal: $50,000

Subtract subtotal from Net Profit: $225,000
Net Income: $175,000

CASH EXAMPLE

NON-OPERATING EXPENSES

Interest: $10,000
Taxes: $40,000
Subtotal: $50,000

Subtract subtotal from Net Profit: $645,000
Net Income: $470,000

Readers will probably notice that the cash-based business seems to end up with more profit than the accrual-based business. I don’t want you to rush out and switch your business over from accrual-based to cash-based because of this. We’re only looking at one month, with a single set of income statement numbers. There are other aspects of the business not accounted for here that will have a moderating effect on what appears to be a higher amount of profit here.

And now we’ve reached the end of the income report. This number – “Net Income” – is the bottom line of your business. It’s the number you want to grow, which you do by increasing Gross Sales and reducing all of the other costs and expenses.