How to Use a Comparative Income Statement for Your Small Business
While running your business, you might not have time to analyze financial numbers. However, knowing how decisions affect your company’s financial health is crucial. When you review your books and records, you can make plans to grow your business. It is time to become familiar with a comparative income statement if you want to boost your profits. Here is how this financial statement can help your small business.
Is This Document the Same as an Income Statement?
Some people may refer to an income statement as a profit and loss statement. No matter the name, the report shows your sales minus any expenses. At the top of the statement, you will see the number of sales earned in a period. After that, the business expenses are deducted, giving you a net profit at the bottom of the statement. This income statement can show how your business decisions affect the net income for that period.
Looking at an individual statement will only give you the results for one specific period. In many cases, you will want to compare one period to another to see the long-term effects of your decisions. That is where a comparative income statement can help. If you need help compiling an income statement, any company offering small business accounting services can assist you with that document.
Is a Comparative Income Statement Important?
A comparative income statement will combine the information from several statements into a single report. This statement can help you measure your business performance and identify financial trends. It also allows you to compare your profits and losses to other businesses. The statement is usually organized into two or three columns representing an accounting period. The most recent periods are usually closer to the left side of the page.
A comparative income statement can assist with many types of accounting tasks, such as:
- Provide a review of the business’s performance
- Compare profit and losses to previous periods
- Determine a pattern in sales
- Measure your business against others
A comparative income statement makes an excellent tool for business owners. For instance, an income statement might tell you that sales dip every April. You can boost your marketing efforts for the month when you have access to that specific information.
When you compare several financial statements, you can see a trend in performance. Comparing reports is time-consuming and confusing, but this statement allows you to track your business’s performance trends. With a comparative income statement, you will not have to flip between the documents. You have all that information right in front of you.
How to Read a Comparative Income Statement
If you want to understand your business’s financial data, take a look at your comparative income statement. You will want to analyze the information in two ways: horizontally and vertically. With these types of analyses, you can understand the business’s performance. Additionally, the statement can help you see patterns to help predict future trends.
The horizontal analysis examines your business’s trends over a period of time. It can help you see growth patterns. To calculate growth rates, you need to analyze the change percentage between accounting periods. If you want to find the change in the percentage between two numbers, you need to determine the difference in dollar changes for each period. For example, if you gain $55,000 in 2021 and $60,000 in 2022, then your business’s dollar change is $5,000.
You can divide the dollar change amount by the year’s profit. For example, if the base year profit is $55,000 for 2021, then the result is 0.09 ($5,000 / $55,000 = 0.09). After getting that number, you will want to multiply the result (0.09) by 100. With that, you will have the percentage of change. For this specific example, there is a 9% change.
Vertical analysis helps compare the size of different line items in a financial report. To use vertical analysis, you have to divide each line item by the total amount of revenue from a product or service. After that, you can multiply that number by 100 to get your business’s percentage. With that, the number tells you what percentage of each dollar was earned as profit.
Why Are Comparative Income Statements Crucial?
You have to measure performance when you are a small business owner. When you don’t understand a comparative income statement, you might not know whether your decisions work for your business. Additionally, these statements help you track profitability over several periods.
The comparative income statement shows you how your business has performed. For example, you can compare your return on investment (ROI) from last year to the current year. When it comes time to sell the company, some buyers will use comparative income statements to determine whether the business is a good investment.
Accounting is a challenging part of running a business. However, it can be an eye-opening experience, especially when you review your financial statements. You want to know whether the time and effort are paying off for your business. A comparative income statement will provide detailed insight into your business’s financial health.
Contact the Professional Team at TMD Accounting
When you need an accountant for my small business, call TMD Accounting. We’ve served the Gloucester County area for over 40 years. Our team assists small business clients with their bookkeeping and accounting needs. To learn more about what our professionals can do for you, give us a call at 856-228-2205.