Do You Know What Your Income Statement Tells You?

Most attorneys might have a general idea of what an income statement is, however do you know how to interpret what each number on the page can tell you about how you’re running your firm?  So you had income this period of $100,000, your supplies expense was $4,000, or your net profit was $10,000.  Are those numbers good?  What do they really mean?

The most important thing to remember about an income statement is that it can really only talk to you in a meaningful way when it is being compared to something else.  This can be a cash projection or a previous period’s income statement.  When using an income statement as a tool, the first thing that should be done is to make sure that you put it in a comparative format.  This means that you display every line item as a percentage of sales in addition to showing the actually dollar amounts.  This way you can evaluate trends over time and make meaningful projections into the future.

$10,000 in net profit may be great for a firm that is bringing in $100,000 in annual revenue, or a 10% profit margin; however that doesn’t look nearly as good on an income statement where the annual revenue, is $1,000,000 for a 1% profit margin.  The numbers themselves don’t hold nearly as much value as the percentages.

Comparing income statements from different time periods (in percentages) is one of the easiest ways to identify potential red flags within your business.  Recognizing a change in the percentage of any line item and asking the simple questions of “why did this happen?” and “does this change make sense?” can go a long way.

Creating or reviewing an income statement doesn’t need to simply be a chore, it can be a meaningful decision making tool for your firm.