Welcome business owners, to increasing your company’s financial performance through sound accounting practices.
But before we get into the nitty-gritty of the statement of operations, or income statements as it is also commonly known, let’s kick off things with an inspiring account of how one business owner improved his company’s performance by increasing his financial aptitude.
Let’s call this business owner, Diago. He is the proud owner of a bakery called, ‘Diago’s Sweet Treats’. He has a talent for creating mouthwatering pastries, but after years of dedication, Diago’s small business seemed to be losing money faster than he could make it, despite high sales figures. Diago had a hunch that the problem lay in his accounting practices. They were dismal, to say the least.
So Diago enrolled in a basic short course focused on improving financial performance through understanding financial statements, like the statement of operations. As he progressed, he was amazed at how much better he could understand his operating income and operating expenses by analyzing the bakery’s income statement. The word, net income suddenly had a new meaning for Diago.
Ready to tackle his company’s financial performance Diago took the step to outsource his bookkeeping to a CPA accounting firm, which not only helped him change his company’s financial position but gain even further financial confidence in managing his cash flow.
Together they negotiated lower supplier costs, implemented inventory management to reduce wastage, analyzed which products made the most money, and set new financial targets to get Diago’s business out of debt and generating a profit.
If you need help doing the same, we are ready to discuss your needs. Schedule a call with Hall Accounting Company. Bookkeeping, business taxation, CFO services, and financial reporting are just some of what we offer.
Right, so now that you understand the importance of having a statement of operations, let’s get into the finer details, and get your business on track.
A brief overview of the different financial statements
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In business, several important documents communicate the financial health of a company. Let’s discuss them briefly.
Cash flow statement
The Cash Flow Statement is a financial statement that provides an overview of a company's cash inflows and outflows during a specific period.
The Cash Flow Statement helps stakeholders understand how a company generates and utilizes cash, providing insights into its liquidity, solvency, and ability to meet financial obligations. It complements the Balance Sheet and Income Statement by providing a comprehensive view of a company's financial performance and cash management practices.
Balance Sheet
The balance sheet provides a snapshot of a company’s financial position at a single point in time, say financial year-end. It presents a summary of a company's assets, liabilities, and shareholders' equity.
The Balance Sheet follows the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. This equation must always balance, ensuring that a company's assets are financed by either debt (liabilities) or equity (shareholders' investment).
Operations Statement
The star of the show that we will be focusing on for the rest of the article is the operations statement, statement of operations, income statement, or profit and loss statement. Known by all these terms it focuses on a comprehensive view of the company’s revenues, total operating expenses, tax liability, and bottom line.
Key elements of an operating statement
Total Revenue
Total revenue refers to the overall income generated by a business from its primary activities, such as the sale of goods or services, before deducting any expenses.
Sales and service revenue as separate line items combined as Total Revenue
Cost of goods sold and cost of services as line items combined as Cost of Sales and Services for operating costs
Gross Profit Margin (Revenues minus Cost of Sales and Services)
Gross profit margin is a key financial metric that measures the profitability of a company's core business activities. It represents the percentage of revenue that exceeds the cost of goods sold (COGS), indicating how efficiently a company is producing and selling its products or services.
Operating Expenses
Operating expenses are the ongoing costs incurred by a business to maintain its day-to-day operations and support its revenue-generating activities. These expenses are necessary for running the business and are distinct from expenses related to investments, financing, or non-operating activities.
Salaries and wages
Rent and lease payments
Utilities
Insurance premiums
Office Supplies
Advertising and marketing
Travel expenses
Maintenance and Repairs
Selling & Marketing
General & Administrative
Research & Development (R&D)
Manufacturing
Depreciation
Profit (loss) from Operations
Interest expense (net)
Non-operating items, including a line item for net interest income
Profit (loss) before taxes
Income taxes
Net income (loss) or net profit (loss)
Other comprehensive income (loss)
Below you see a basic example of a statement of operations. However, depending on the type of business and the size of the company, this can be more complicated.
Image courtesy of Stock Analysis
Statement of operations (SOO) - Valuable insights
By analyzing the financial data presented in this document, businesses can make strategic and operational decisions based on facts. It helps the stakeholders understand the company’s efficiency, profitability, and sustainability. These are important metrics to follow if you want to improve the financial health of your business.
What the SOO does, is reveal key metrics that pinpoint problem areas. These key metrics or key performance indicators (KPI), point you in the right direction.
Gross profit margin
Indicates the percentage of revenue that is retained after subtracting the cost of goods sold. A higher gross profit margin suggests strong pricing power and operational efficiency.
Operating profit margin
Measures the percentage of revenue remaining after deducting operating expenses. This number represents the company’s ability to generate income from its core business activities.
Net profit margin
Represents the percentage of revenue that remains as net income after expenses, including tax and interest. This is an indicator of overall profitability.
Revenue growth rate
Compares the change in revenue over a specific period. It indicates whether revenue is increasing, decreasing, or stagnating over time.
Statement of operations-decision-making superpower
Once you are armed with information from the key metrics, now you are ready to make some strategic and well-informed decisions, just like Diago did, alongside his accounting firm.
Here are some practical tips to help you use the information from the SOO wisely.
Cost reduction
Every financial person you’ll ever meet has the same tune. Reduce your costs. It’s like a bad line in a love song, that’s going to end up breaking your heart, but it’s sound advice.
Diago was watching his revenue slip through his fingers. His business should have been thriving, and instead, Diago was taking out loans to cover basic expenses such as staff salaries. It was confusing. But this kind of financial confusion sets in little by little over time as business owners neglect or don’t know how to, manage their accounting processes and end up having no idea what money is going out of the business or why.
That is why operating and non-operating expenses are a huge focus of any plan to correct the financial difficulties of a business.
Where was all Diago’s money going to? Overpriced supplies, ad hoc bakery purchases, unmonitored inventory turnaround, and careless use of resources such as utilities. It all mounts up in the end.
Increase revenue
Yeah. Same love song, same tune. Reduce your expenses is always followed with, ‘increase your revenue’. It’s the advice you know but can’t quite implement.
To increase revenue you must analyze revenue streams, like Diago did. Understanding which products are good sellers and which ones are making you the most profit is key to managing your revenue and balancing that with expense reduction. It’s quite simple. Once you know which product costs you the least to make, and brings in the most revenue - then gear up to make more of that product.
Consistently doing the right things in business is what brings the financial results.
Resource allocation
Once you’ve figured out how to increase revenue and cut costs, you are ready to allocate resources to make those decisions a reality. A regular review of where resources are being used should be a best practice in your business.
Consider outsourcing your bookkeeping and financial analysis
There are some very sound reasons for getting the right help from an accounting firm that can support your business and help you through critical decisions.
As a business owner, you already wear many hats and juggle numerous responsibilities to keep your business running smoothly. An accounting firm, such as Hall Accounting Company, has a team of experienced professionals specializing in comprehensive financial analysis and management services, tailored to the unique needs of small and medium-sized businesses like yours.
The collective experience and expertise of the firm will be yours. This means you don’t have to re-educate yourself and become a financial guru overnight. Unless you want to, of course. We can help you drive your business in the right direction while you concentrate on doing the things that you opened your doors for.
Do you really want to spend hours and hours pouring over financial statements? Or sorting out daily accounting tasks so that you can draw a financial report?
Wouldn’t you rather spend that time doing what you love?
If you do, Hall Accounting Company is ready and willing to have a meeting with you to discuss your unique needs. We won’t charge you for this meeting and to make everything easier, we’ll do it online and you can decide from there.
There are many valuable insights that we haven’t discussed in a short article like this and a meeting would be the ideal place to expand on these insights.
Schedule a call with an accountant
Whatever you decide to do, we hope that this article has been helpful if you were looking for a basic understanding of the statement of operations.
May the force of the SOO be with you!