If you’re starting a business in Utah this year, you probably already know you’ve come to the right place. Utah ranks third on CNBC Best US States for Business 2021 list, achieving high marks in the Infrastructure, Economy and Business Usability categories.
But if you have a passion for macrame or lawn manicures but not math, you may not yet have a clear idea of the financial aspects of your business plan. Before investors or bankers agree to fund you, they need to know whether your business will be profitable or not. They will want to see an income statement or an income statement (P&L). This statement covers revenue, cost of goods sold, gross margin, operating expenses, operating profit and net profit. Here is some additional information about each of these elements:
Revenue is the amount you make from sales before all expenses are covered. The lower this number, the more your expenses should be reduced. Income is essential.
“Without [revenue], your business cannot generate a profit and remain viable in the long term, ”said Neil Kokemuller in an article published for AZ Central. “You have to collect income to justify the fixed and variable expenses you pay just to run a business. Simply put, zero or low income leads to an unprofitable business and negative financial results.
Cost of goods sold
Cost of Goods Sold (COGS) refers to the amount you spend to make your products or provide your services. This includes all expenses spent on the production of goods or services, but does not include indirect costs such as overheads or sales and marketing.
What if you sell items online? Let’s say you have a business that resells used clothing. If you have unique packaging that would appear on a shelf if your business had a physical location, that would be included in your COGS. But the duct tape and cardboard used to ship the items would not be included, nor the shipping costs, according to Sean Ross at Investopedia.
Gross margin and gross margin
How much money do you have left to cover expenses? To find out, take your income and subtract the COGS. It’s your gross profit. Next, to determine your gross margin, divide your gross profit by your total sales.
For example, let’s say you generated $ 50,000 in the last quarter and your COGS was $ 30,000. Your gross profit would be $ 50,000 minus $ 30,000: $ 20,000. Then, to calculate your gross margin, you divide your sales of $ 50,000 by $ 20,000 and multiply by 100. Your gross margin would be 40%.
Knowing your gross margin helps you know if you are improving quarter over quarter. And if you know the average gross margin for your industry, that gives you an idea of how you stack up against your competition.
Operating expenses tell you how much it costs to keep your doors open. This includes insurance, utilities, office supplies, advertising costs and more. To calculate this number, subtract your COGS from your total expenses. When you track your operating expenses, you can better control them and maximize your profits.
“Operating profit is a measure that shows how much of a company’s revenue will eventually become profits,” Adam Hayes told investopedia.com. Why is this important? Because “many companies focus on operating profit when measuring the operational success of the business.”
For example, Company A could see its operating profit increase by 30% year over year. As the company seeks to merge with Company B, this growth in operating income gives Company B shareholders confidence that the merger is a good idea, even though Company A’s first quarter sales have declined. dropped by 2%.
You can calculate operating income by subtracting your operating expenses from your gross income.
Net income is “the total income of a business minus its costs, expenses and taxes,” according to Merrill Financial Associates, an investment strategy firm in Provo. “Net income is the net result of a company’s income statement (which can also be called an income statement). “
With income as the top result, your bottom line is your income less COGS, operating expenses, and any other expenses. This number is important because it tells you how much revenue your business is keeping.
When you group your income, cost of goods sold, gross margin, operating expenses, operating income, and bottom line, you can create an income statement that will show investors and bankers what they have. need. And with a better understanding of your business’s financial situation, you can make better decisions. So, enterprising dreamers, don’t be fooled by the numbers! It’s easier than you think.