Of the three main financial statements, the income statement generally has the greatest bearing on a manager’s job. That’s because most managers are responsible in some way for one or more of its elements:
Generating revenue. In one sense, nearly everyone in a company helps generate revenue…the people who design and produce the goods or deliver the service, those who deal directly with customers. But it’s the primary responsibility of the sales and marketing departments. If same-store or same-product revenues rise faster than the competition’s, you can reasonably assume that the folks in sales and marketing are doing a good job.
It’s critical that managers in these departments understand the income statement so that they can balance costs against revenue. If sales reps give too many discounts, for instance, they may reduce the company’s gross profit. If marketers spend too much money in pursuit of new customers, they will eat into operating profit. It’s the manager’s job to track these numbers as well as revenue itself.
Managing budgets. Running a department means working within the confines of a budget. If you oversee a unit in information technology or human resources, for example, you may have little influence on revenue, but you will surely be expected to watch your costs closely and all those costs will affect the income statement. Staff departments’ expenses usually show up in the operating expenses line. If you invest in any capital equipment…you will also add to the depreciation line. Close study of your company’s income statements over time reveals opportunities as well as constraints. Suppose you would like to get permission to hire one or two more people. If operating expense as a percentage of sales has been trending downward, you will have a stronger case than if it has been trending upward.
Managing a P&L. Many managers have P&L responsibility, which means they are accountable for an entire chunk of the income statement. This is probably the case if you’re running a business unit, a store, a plant, or a branch office, or if you’re overseeing a product line. The income statement you are accountable for isn’t quite the same as the whole company’s. For instance, it is unlikely to include interest expense and other overhead items, except as an “allocation” at the end of the year. Even so, your job is to manage revenue generation and costs so that your unit or product line contributes as much profit to the company as possible. For that you need to understand and track revenue, cost of goods sold, and operating expenses.
Differentiating between one-time and ongoing expenses. One-time costs include obtaining assets like equipment or machinery, but may also involve licenses or permits for certain businesses. These costs usually occur during the startup phase or when a business expands. Expenses that must be paid monthly or periodically (like quarterly) represent ongoing costs. Variable costs, however, will fluctuate according to factors like output, production, or consumption.
Why separate costs into assets and expenses? Expenses are deductible against income, so they reduce taxable income. Assets, on the other hand, are not deductible against income.
For more thoughts on the Income Statement, view the free video entitled The Financials – Managing Your Business Session 1 Understanding Key Concepts and read a free sample of the new book “Small Business Thoughts Real-Time Strategic Planning“.
Copyright ©John Trenary 2022