The Income Statement provides essential insight into the health and long-term viability of your small business. But, the thought of creating a spreadsheet and doing math might fill you with dread and anxiety. I totally get it – but what if, instead, it could spark your imagination? You need to learn how to manage small business finances and confidently navigate an Income Statement, so you can objectively assess and improve the financial performance of your business. 

---

How to Manage Small Business Finances with an Income Statement ☑️

Before diving into how to manage small business finances, let’s pause and check in.

Not everyone likes looking in the mirror – it can be uncomfortable, especially if you’re worried about what you might see. 

Regular reflection and meta-cognition (thinking about your thinking) are important tools that can help you improve and grow – though, not always in ways you expect. 

Sometimes, you need to check-in with yourself and see how you’re doing, assessing your strengths and weaknesses. 

Simply put, when you know better, you do better 

The same idea applies to how to manage small business finances.

When you have visibility to the financial health of your business, you can make more thoughtful decisions about it.

When you avoid that visibility, you’re more likely to make decisions that are based in fear and stress – and you know what that yields. 

You might need to pause and ensure you’re in the right headspace for rational analysis – because, occasionally, the data reveal difficult decisions may be needed. 

| RELATED: How to Manage Money in Business Always Starts with a Mindset Boost

Like with yourself, it can be uncomfortable at first – nothing like a little honest, indisputable math to help you get a reality check. 

Clarity can also yield curiosity though. If something’s not working, well, you have an opportunity to ask new questions, learn how to adjust that variable, and fix the problem.  

Therefore, every obstacle in your business presents an opportunity to strengthen your business. 

And, the Income Statement is the tool/report you need to reveal those opportunities and spark your imagination. 

Critically, if you want to learn how to manage small business finances, creating and understanding an Income Statement for your business, is an important first step. 

If you haven’t learned how to manage small business finances yet, you’re in the right place. 

I’ll guide you through it. But, don’t forget that new things take time to learn. 

You won’t gain mastery over your small business financials in one big leap. It’s going to come with small steps. So, pause where you need to if it helps you absorb the material. 

You can also download my FREE Business Financial Health Checklist resource, which includes some of this information if you’d like to download some quick-reference material.

| FREE CHECKLIST: You Absolutely Need This Simple Business Financial Health Checklist

Ready? Let’s go!

---

This is Small Business Bookkeeping 101 🤓

Profitability is an essential measure of how to manage small business finances well.

Without profitability, you’ll quickly ruin your small business financials.

| RELATED: How to Manage Business Finances & Avoid These Big 5 Costly Mistakes

Simply put, you need to know if you’re making money or burning a hole in your pocket. 

To achieve financial gain, revenue has to be greater than the sum of your expenses. 

That, of course, means you need to know the difference between sales and profit. 

| RELATED: How to Manage Business Money Starts with the Difference Between Sales & Profit

And, have a basic understanding of break-even analysis. 

| RELATED: How to Make a Small Business Profitable with 1 Simple Equation

As you can see from those links, there’s a lot of great resources to help you learn the basics of business and small business bookkeeping 101 right here on the 321 Liftoff blog. 😉

And, just in case you need another, take a look at my Small Business Money Management Email Course to learn how to tackle common financial growing pains you’ll encounter as you build your business.

| EMAIL COURSES: 4 Amazingly Simple Email Courses For Small Business Owners

Assuming you understand the urgency of profitability in your business, let’s dive into the Income Statement, then we’ll break it down and define each metric in turn. 

Take a look at the infographic below to get a sense of what’s included on the income statement at a high-level. This shows you how the math works:

Want to know how to manage small business finances? Learn these key terms…

Now, here’s what those metrics actually mean: 

Revenue 

Net receipts or sales less returns and discounts. It’s the number of units sold multiplied by the price per unit. 

Cost of Goods Sold (COGS)

The costs associated with making and selling/providing your products or services, like raw materials, supplies, packaging, labor, etc. 

Gross Profit

Profit generated by sales. It’s revenue minus cost of goods sold. Critically, if your gross profit is negative, your business won’t last very long – you’ll need to address the Cost of Goods Sold to change the math. 

| RELATED: How to Lower Business Expenses and COGS to Increase Profitability

Operating Expenses

All other expenses from your day-to-day operations that are not associated with production, like office/retail space or other bills, running your website, marketing activities, legal or other fees, insurance, paying your 1:1 small business coach 😉, etc. 

Operating Profit

Profit from business operations. It’s gross profit less operating expenses. If operating profit is negative, you’ve got an opportunity to reduce expenses and streamline operations to return to profitability.

Remember, learning how to manage small business finances takes time and practice – be patient with yourself as you figure this out!

| RELATED: How to Make a Business Profitable with 4 Clear Financial Boundaries

Interest 

The interest (if any) accrued on interest-bearing loans as part of ongoing business operations during the period covered by the Income Statement. This may or may not apply to you – think loans or investments in machinery or heavy equipment. 

Earnings Before Taxes 

Exactly what it sounds like. It’s operating profit minus interest. 

Taxes 

Yes, you have to pay taxes. Check your local laws and consider hiring a tax professional if needed. You can opt to make quarterly tax payments or pay annually at tax time. In either case, you’ll want to set money aside to account for them. 

Editorial note: you *get* to pay taxes. Sure, it doesn’t feel good to part with your hard-earned money. But, taxes pay for shared infrastructure – like the roads that lead to your store, police and fire departments that keep your community safe, schools, and research investments that result in things like the internet (where your website can be found). 

Net Income 

Total financial gain after all costs, expenses, interest, and taxes are accounted for. It’s your overall measure of profitability. 

---

Additional Tips for Making an Income Statement 🎯

In order to calculate the above metrics, build an Income Statement, and analyze it after, there are a few things you’ll want to do regularly to make managing your small business financials way easier.

Learning how to manage small business finances? Here are Some Tips & Suggestions…

Track receipts of your sales and expenses

And, not just in their amounts, but also when they occurred. 

The Income Statement isn’t cumulative. It represents a period of time you specify (typically: monthly, quarterly, annually). 

Know the difference between types of costs

Some expenses are part of producing your product, other expenses are a result of operations. 

It’s not just about documenting them correctly for the purposes of making an Income Statement.

It’s because the remedies needed to reduce and/or optimize expenses are different for different categories of expenses. 

Don’t freak out As you learn how to manage small business finances

Yes, looking at these metrics can put the overall health of your business in clear and unambiguous terms and that can be scary. 

But, it’s better than keeping it hidden. 

Get curious about what’s uncovered

There are several points in the Income Statement where you calculate different types of profit. 

That’s intentional, not redundant. It’s designed to help you isolate the variables that are driving your overall profitability (net income). 

At each point, you can ask questions that spark your imagination. For example:  

• What costs are driving COGS to be so high? Are those essential costs? 
• What are my operating costs? Am I being disciplined enough? 

Remember, as previously stated, every obstacle in your business presents an opportunity to strengthen your business. 

It’s your job to take those opportunities and act on them

Lucky for you, there are a few essential entrepreneurial skills you can learn with my workbook to get curious, analyze, and execute on these opportunities.

| WORKBOOK: How to Run a Business Successfully with These 3 Essential Entrepreneurial Skills

---

How to Manage Your Business Income & Track It Over Time 📊

As your business gets started, try creating an Income Statement at the end of each month to track your small business financials. 

You’ll want to do it consistently – even for months where you haven’t made any sales.

If nothing else, you’ll give yourself more opportunities to practice learning the math and the process than just quarterly or annually. 

But, more importantly, you’ll be able to use the information to paint a more complete picture of the growth trajectory of your business. 

Better yet, the net income from each month becomes a data point that you can track over time. 

A monthly view of net income over the course of a few months will open an opportunity for you – you’ll uncover ways to grow and improve your financial performance.

how to manage small business finances? With An Income statement You can start to…

Reflect on your wins

Use the data as an opportunity to pause and reflect on what’s working and what might not be working. Ask yourself questions like:

• How are you doing compared to this time last year? 
• What are you most proud of with respect to your financial results? 
• Which months were your strongest from a financial perspective? What happened in those months that led to that? What do you want to repeat? 
• What was your energy like in your strongest performing months? What is your energy like now?

| RELATED: 1 Simple Strategy You Need to Boost Your Creative Energy

Analyze your business

Look back at last month, for example. You can get into the data and start to pick it apart. Ask yourself questions like: 

• What was the main driver of expenses last month? 
• What was total revenue last month? Is that at, above, or below my goals? 
• How profitable is the business compared to last month? 
• What issues need to be addressed this month to ensure profit goes up? 

Look for trends and patterns

Don’t just look at individual data points. You also need to look at how the business changes over time. Ask yourself questions like: 

• How has the Cost of Goods Sold changed over time? 
• How is profit trending over the last few months? 
• What’s driving these trends? What might help change the direction? 
• How sustainable is the business from a financial perspective? 

| RELATED: How to Lower Business Expenses & Increase Profitability with 1 Essential Idea

Hold yourself accountable

If you’ve named goals or financial targets, you can use the Income Statement as an accountability mechanism. Ask yourself questions like: 

• Where is the business today compared with your goals? 
• What’s getting in the way of you achieving your goals? 
• What can you do this month to raise the bar of financial performance? 

| RELATED: 3 Powerful Steps to Setting Clear Financial Goals For A New Business

In time, you’ll come to see this as one of your most important business routines and a key step in how to manage small business finances.

---

How to Make an Income Statement in Excel 👩🏻‍💻

Another bit of small business bookkeeping 101 is to use a digital spreadsheet.

There are a lot of fancy expense and revenue tracking solutions out there that make this process a bit more automatic (I really like Quickbooks, for example). 

If you’re not ready to invest yet though, it’s very easy to use a basic spreadsheet application. 

Just use the math I’ve outlined above to create a simple table. 

Here’s an example of how to make an Income Statement in Excel: 

Be sure to double and triple check your formulas to make sure the math is right. 

Once you have a table that works correctly…

Learning how to manage small business finances? Try this…

Create a template for each month or quarter

Remember, the Income Statement is a snapshot in time – it’s not cumulative. The table you’ve made might be for a specific month or quarter. So, with the formulas already there, simply copy them over to create an Income Statement template for the balance of the year. 

Create a new tab for each year

When you’re ready to start a new year for either tracking or tax purposes, make a copy of the tab from this past year’s data and rename it for the current year.  

Create a visual or graph

Behavior change is easier when there’s a visual cue to trigger action or reflection. If just looking at numbers isn’t your thing, make it visual for an at-a-glance view of your financial performance. 

Here’s an example of what that might look like:

As with all things related to the financial health of your business, this might take some tinkering to get right – and to get into a rhythm with. 

These are just ideas to help you learn how to manage your business income.

---

Learn How to Manage Small Business Finances – Start Here 🤓

Creating an Income Statement and learning how to manage small business finances doesn’t have to fill you with dread, triggering uncertainty and avoidance. 

Actually, it can be an enlightening and constructive exercise – something that prompts reflection and fuels your curiosity. 

So, instead of framing it as something you have to do, try framing it as something you get to do. 

You get to…

• Pause and reflect on the state of your business. 
• Identify trends and patterns that improve your decision making. 
• Track critical data that will help you set goals and drive accountability. 
• Uncover opportunities that will strengthen your business if solved.

Remember, confidence is earned with practice. You can do this!