Income Statement Glossary & Example – Week #5 of The Financial Operating System®
Building on last week’s financial assessment, this week we define several terms related to income statements. If you had any trouble analyzing financial condition and performance, this week’s not hopefully will help you understand certain key financial concepts for evaluating performance.
Key Concepts:
- Accrual Accounting: Recognizing revenue and expenses when services are provided, not when cash changes hands.
- Revenue: Sales generated from goods and services.
- Cost of Goods Sold (COGS): Expenses directly related to producing goods or services sold.
- Gross Profit and Margin: Revenue minus COGS, expressed in dollars and percentage, representing the efficiency of production.
- Labor-Loaded Gross Profit: Gross profit minus direct labor costs, reflecting value creation.
- Operating Profit and Margin: Profit after deducting all expenses except taxes and interest, showing overall efficiency.
- Net Profit and Margin: The bottom-line profit after all expenses, including taxes and interest.
- Cash Flow: The actual movement of cash in and out of the business, distinct from net profit.
Example Income Statement:
- Illustrates how to format an income statement for meaningful insights.
- Breaks down expenses, profit segments, and margin percentages for clearer reporting.
The Financial Operating System emphasizes the need for accurate, segmented income statements, enabling business owners to assess profitability in a systematic and comprehensive manner. It lays the groundwork for understanding and tracking financial performance metrics.
Next Step:
Business owners can self-implement The Financial Operating System. Chapters are available to download at smartbooks.com/resources or you can buy the whole book from Amazon (the marketing firm version or the general business version).
If you would like assistance with implementation or would like to accelerate results for your business, please contact author Cal Wilder at cwilder@smartbooks.com or book a free consultation with our team directly using this calendar link.