Financial Plan - Income Statement

Income statement is also known as Profit and Loss Statement. The income statement is important for Venture Capitalists as it is the basic measuring stick of profitability of the company. The Income Statement provides the investor with much insight to the company's revenues and expenses. You can identify where the company spends much of its income and compare that to similar companies. You can also compare a company's performance with previous years. Most importantly, the income statement tells an investor if the business is profitable. Let us talk about the components of a typical income statement.

Gross Profit on Sales: This is the net value of Sales of the company less Cost of Goods Sold.

Net Sales:This is defined as revenue generated from the sale of all the company's products or services minus an allowance for returns, rebates, etc.

Cost of Goods Sold:It is the money that company spends to buy the raw materials needed to produce its products and manufacturing its products and labor costs.

Operating Income: This is a company's earnings from its business after it has deducted its cost of goods sold and its general operating expenses. Operating income excludes interest expenses, other financing costs, income generated outside the normal activities of the company, such as income on investments or foreign currency gains.

General Operating Expenses:These are normal expenses incurred in the day-to-day operation of running a business which include sales or marketing expenses, salaries, rent, and research and development costs.

Depreciation: It is defined as the gradual loss in value of equipment and other tangible assets over the course of its useful life. Accountants use depreciation to allocate the initial purchase price of a long-term asset to all of the periods for which the asset will be used.

Operating Income: This is very important as it is measures profitability based on a company's operations. In other words, it assesses whether a company is profitable. It ignores income or losses outside of a company's normal domain. It also excludes extraordinary events, such as lawsuits or natural disasters, which in a typical year would not affect the company's bottom line.

Earnings Before Interest and Taxes (EBIT): This is the sum of operating and non-operating income and is also known as "other income" and "extraordinary income (or loss)". As its name indicates, it is a firm's income excluding interest expenses and income tax expenses.

Net Earnings:Also known as Net Income, is the proverbial bottom line. It measures the amount of profit a company makes after all of its income and all of its expenses. It also represents the total dollar figure that may be distributed to its shareholders. Net Earnings are also the typical benchmark of success. Negative Net Earnings are are known as Net Loss :).

Retained Earnings:This is the amount of money that a company keeps for future use or investment. Another way to look at it is as the earnings left over after dividends are paid out. Generally, a company has a set policy regarding the amount of dividends it will pay out every year.

Here is the brief summary in terms of formulae:

Gross Profit on Sales = Sales - Cost of Goods Sold
Operating Income = Gross profit - General Operating Expenses - Depreciation Expense
EBIT = Operating Income +(-) Other Income (loss) +(-) Extraordinary Income (loss)
Net Earnings = Earnings before Interest and Taxes - Interest Expense - Income Taxes
Retained Earnings = Net Earnings - Dividends