That’s why we’ve teamed up with Stripe, a leading financial infrastructure platform, to launch the Bench app on the new Stripe App Marketplace. The app allows you to connect your Stripe account and easily access your income statement at the touch of a button in your Stripe dashboard.
Learning how to interpret the Bench income statement will give you a greater insight into your company’s finances. Additionally, a good understanding of how the different line items interact will help you optimize your business’s financial performance.
We’ll take you step-by-step through the Bench income statement and how it describes the current financial state of your company.
What is an income statement?
Before we begin our walkthrough of the Bench income statement, let’s take a closer look at why this document is essential to assessing the financial health of your company.
The income statement is one of the most valuable financial statements for every business. It shows a company’s revenues and expenses over a pre-defined time period and how profitable it is.
While the statement is usually prepared yearly, you can also choose to run it monthly or quarterly. With Bench, your Bench bookkeeper completes your bookkeeping every month which automatically updates your income statement in the app.
How to read the Bench income statement
After opening the Bench app, you can view your income statement at a glance or dig deeper for more details. The first view offers a generalized report of revenue and expenses, but if you’re looking for additional information, simply click on the down arrow directly to the left of the main category.
Here’s what your income statement’s categories and subheadings mean.
This is the total amount of money that the business brings in through its sales. This figure includes both cash and credit sales, as well as other forms of income. Two subcategories are found under this heading.
- Sales revenue: This revenue subheading represents the total amount of money that your business brings in from selling its products or services. This figure is important because it helps track performance and assess overall profitability.
- Returns and allowances: Returns are counted when a customer returns goods for a refund that they purchased from the business. Allowances are recorded when the business provides discounts to customers, either for damaged items or early payment of invoices. This category is important since it has a significant impact on the bottom line of the income statement.
Further reading: Revenue vs. Profit: The Difference and When They Matter
Cost of sales
Cost of sales is the total cost of goods sold during a period of time. This includes materials, labor, and overhead costs.
- Cost of goods sold: Often referred to as cost of goods sold, or COGs, these are direct expenses you pay to create your products or services. This consists of the price of raw materials plus labor in manufacturing, or the total wholesale price of the products you sell in retail.
- Depreciation also contributes greatly towards this number because each accounting period sees less value put into these assets after they’ve been earned back many times over during its lifetime.
- Cost of service: This category includes the cost of labor, materials, and other expenses associated with providing a service.
This amount is calculated by subtracting the cost of sales amount from your total revenue. Expenses will be deducted from this amount. The only ways to increase this figure is to increase the amount customers pay for your goods or services or to decrease your cost of sales amount.
Also known as Selling, General, and Administrative (SG&A) expenses, operating expenses are the costs associated with running the business on a day-to-day basis. These costs may include rent, utilities, salaries, insurance, office supplies, and other business-related expenses.
The net profit, also known as net income, is calculated by subtracting the total expenses from the total revenue. A positive net profit indicates the company is doing well, while a negative figure indicates the company is operating at a loss—which isn’t always a bad thing. When you can keep tabs on your bottom line, though, you’re in a much better position to make changes that keep your business profitable.
How to download your income statement
Below the income statement headings is the Download report (.xls) button. Selecting this feature will download a complete, printable copy of your income statement to your computer or device. The report can be emailed to your accountant, who tracks your business’s income and expenses.
Calculating profit margins
Profit margins are the most important numbers in every business’s financials. At a glance, they show you how much profit your business is making and if it’s enough to cover expenses without incurring more debt. Lenders and investors closely examine profit margins to determine if your business qualifies for loans.
Profit margins are calculated as percentages with information gleaned from your income statement.
The three most important profit margins for any business are gross, operating profit, and net profit margins.
1. Gross profit margin
Gross profit margin is the income your business makes for each dollar earned after COGS. This margin does not include general expenses, interest payments, or income taxes.
To calculate gross profit margin, use the following formula:
Gross Profit Margin = (Total Revenue - COGS)/Total Revenue
We’ll use the business, Computers R Us, to demonstrate how this is applied:
Computers R Us has a total revenue of $80,000 and a COGS of $30,000. Their gross profit margin would be calculated as follows:
$80,000-$30,000/$80,000 = 0.62 or 62%
This tells us that for every dollar Computers R Us makes in revenue, they keep $0.62 as gross profit.
2. Operating profit margin
This profit margin takes COGS and operating expenses into account. The formula for computing operating profit is:
Operating profit margin = Operating Income/Total Revenue
Using our Computers R Us example from above, if their operating income was $40,000, then the operating profit margin is computed as:
$40,000/$80,000 = 0.50 or 50%
For each dollar in revenue earned, Computers R Us takes $0.50 after COGS and operating expenses.
Operating profit margin and gross profit margin can be compared to check the amount of revenue that is used towards general expenses. In our example above, 62% minus 50% is 10%. This means that .10 out of every dollar is spent on operating costs.
3. Net profit margin
Net profit margin is the portion of each revenue dollar that is taken as net income. All expenses including COGS, general expenses, interest payments, and income tax are taken into account.
The formula for net profit margin is:
Net Profit Margin = Net Income/Total Revenue
Using our business example, if Computers R Us’ net income is $6,000, the business’s net profit margin is calculated as follows:
$6,000/$80,000= $0.07 or 7%
For every dollar going into the company, they keep $0.07 as retained earnings.
As you analyze your income statement, net profit margin is one of the main points to focus on. As this figure increases, it shows that your business is becoming more efficient.
How the income statement is used with other financial reports
While your income statement is a powerful tool that acts as a scorecard for your business, it is most effective when used in tandem with a balance sheet and cash flow statement.
The balance sheet gives you a snapshot of what your business owns and owes. This information can be used to assess things like solvency, liquidity, and profitability. The income statement shows the business’s revenues and expenses it took to get there.
The cash flow statement tells you how much cash is coming and going out of the business. This report is especially useful if you use the accrual basis of accounting that records income as an invoice sent to a client, before the actual payment is received. The cash flow statement shows the cash you have on hand to spend right now and not just what is expected from an invoice.
Using all three reports together provides a complete picture of your business’s financial health to make informed decisions for day-to-day operations and future growth.
The bottom line
The income statement is a critical piece of the puzzle for business owners. By understanding how your income statement is shaping your business, you can make better decisions about where to allocate your resources.
The Bench app for Stripe is the perfect way for business owners to get a quick and accurate snapshot of their company’s financial performance. With just a few clicks, you can connect your Stripe account and have access to all the data you need to make informed decisions about your business.
By entrusting your books to Bench, you’ll have access to more powerful tools and features that will help you grow your business while staying compliant with regulations. You can also relax knowing that your finances are in good hands with our team of experienced, knowledgeable, and helpful bookkeeping professionals.
Not using Bench yet and want to see if it’s right for you? Start a free trial with Bench today.