Income Statement Analysis 5 Simple Steps

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5 Simple steps to analyze an income statement like a pro. No previous experience required! • Google Sheets Download: http://bit.ly/HowTo-Income-Statement • https://getpoindexter.com is the easiest and fastest way to model your business planning efforts. Poindexter automatically generates full financial statements and key metrics based on your plans. Fine tune your strategy in minutes. • • Before we begin with the process it’ll help to cover the structure of the income statement so we can familiarize ourselves with how the information is laid out. • Income statements typically follow a standardized format dictating that revenues sit at the top, which is the section that represents all the money we’re making from selling our goods or services. • Just below that, we have the “Cost of Revenues” section, which contains all of the costs directly associated with producing our goods or services for customers. So, in Tesla’s case, things like materials and labor will go in this section. • You may also see this section labeled Cost of Services, Cost of Sales, Cost of Goods Sold and possibly some other “Cost of’s,” but just keep in mind they all indicate the same idea. • Below Cost of Revenues is our Gross Income, which tells us how profitably we’re producing our revenue, and it lets us know how much money we have left over to cover the remaining costs of the business. • The Operating Expense section is where we categorize all of the other things we’re spending money on to run the rest of the company. • Directly below Operating Expenses we have Operating Income, which is the profit, or loss, we’ve incurred as a result of the company’s overall operations. • One of our last stops is the other Income and Expense section. This is where we detail all of the money we’re spending and making on things that aren’t related to the company’s core business. • And now we arrive at our final destination, which is net income. In a very basic sense, this is the money we have made or lost, over the period. In the case of a profit, we can distribute the money back to shareholders or reinvest back into the company to fuel further growth. • In the case of a loss, we would need to somehow cover this shortfall, either with the money we have in the bank, through a loan or by raising money from investors. • So now that we’ve learned about the structure of an income statement we can take a look at converting it over to a common size format, which is part of step one of our process. • A Common Size Income Statement indicates is we’ll be taking the currency values within each line item and converting them into a percentage value relative to one of the line items of our choosing. • It’s standard practice to use total revenues as the basis for converting all of the values into percentages because total revenue tends to be a very important line item. • One of the reasons we call this a common size format is because we can also convert the income statement of one of Tesla’s competitors, like Ford for instance, and do an apples to apples comparison of the two companies in a standardized format. • The next thing we’ll do before moving to step 2 is converting the income statement to show period over period growth, so we can see how each line item is growing or shrinking over time. • That way we’ll create a fuller picture of any interconnectedness between costs and revenue, and can get a better sense of what’s happening as the company grows. • Now we can start step number two by identifying the important line items and their trends and relationships. • To begin, it’s helpful to look at the margins for gross income and operating income. • We can quickly see that Tesla is spending almost 80% of total revenue on the costs associated with producing revenue. • An issue seems to arise when looking at the operating expenses, where Tesla is spending almost 41% of revenue, and Ford is only spending about 10%, • If you’re just starting your business, or you don’t have a comparison to look at for your own company, we’ve developed a few rules to help you identify the line items you may want to analyze in step number 3: • 1. The first is that revenue should always be applied to step number three. • 2. The second consideration are costs that consist of a high % of total revenue. • 3. And the third thing to look for are costs that are growing at a similar, or faster rate, than revenue. • Now it’s time to answer questions about the line items we’ve identified to understand what’s taking place behind the numbers, which helps us develop actionable responses. • The questions are based on an Enhanced SWOT analysis. SWOT is a strategic framework that stands for strengths, weaknesses, opportunities and threats. • Once we’ve answered the questions we’ll then develop a response, or solution and set measurable time-dependent deadlines; completing steps 4 and 5.

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