Understanding the Income Statement
(April 2025)
The Income Statement is a cornerstone of financial management. It offers a detailed view of your business’s performance over a given period—monthly, quarterly, or yearly—and helps guide informed decision-making.
Key Components:
- Revenue
Revenue is the total income generated from sales. It’s essential to track this figure and, if you have multiple revenue streams, break them out into separate line items for more precise analysis of what drives success.
- Cost of Goods Sold (COGS)
COGS includes the direct costs of producing goods or delivering services, such as raw materials and labor. Service businesses should include costs like wages for employees directly involved in delivering the service.
- Gross Margin
Gross Margin is calculated by subtracting COGS from revenue. For example, if revenue is $50,000 and COGS is $25,000, the Gross Margin is $25,000—or 50%. Gross Margin indicates how efficiently revenue is converted into profit before considering other expenses. Declining Gross Margins often point to inefficiencies or rising costs.
- Operating Expenses
Operating expenses include costs such as rent, utilities, administrative salaries, marketing, and software subscriptions. While some costs are fixed, others, like marketing, can be optimized to improve profitability.
- Net Income
Net Income is the remaining profit after deducting operating expenses from Gross Margin. A positive Net Income indicates profitability, while a negative Net Income highlights areas needing improvement. It’s more than a measure of success or failure—it’s a tool to identify inefficiencies and uncover opportunities for growth.
Why the Income Statement Matters
The Income Statement is not just a record of past performance; it’s a guide for future action. By understanding the interplay between revenue, costs, and profits, you can address potential bottlenecks and leverage growth opportunities.
With unsold products piling up, the business had to dedicate precious warehouse space to items that just weren’t moving. This created a costly cycle of warehousing inventory, which could have been avoided if the business had cleared out low-selling stock more aggressively.
Contrast that with another product-based company I worked with a few years ago, which had a much more employee-focused approach. Each Thanksgiving, they hosted a company-wide celebration, shutting down the warehouse for a catered feast. It was a great morale booster. But they didn’t stop there—they also used the opportunity to turn excess inventory into a win for their employees.
The company held an exclusive employee-only Christmas sale, offering discounted items that had been sitting in the warehouse. Not only did this clear out unwanted inventory, but it also gave employees a chance to buy holiday gifts at unbeatable prices. This simple event freed up valuable space while enhancing employee satisfaction—a win-win all around.
Inventory Costs: More Than Just the Products
What’s the lesson here? Excess inventory isn’t just a product problem—it’s a space problem, too. Even if you own your facility, you’re still paying a cost for storing things that don’t sell. The more clutter you have, the more you limit space for higher-demand items. And when you hit capacity, the expenses don’t stop. Businesses often find themselves spending thousands on additional storage—racking systems, leased space, you name it—just to accommodate stock that shouldn’t be there in the first place.
The same principles apply to other areas of your business.
Reducing Software Redundancies
Think about your business software. Over the years, many companies adopt various software tools, often without fully transitioning from one to another. It’s easy to end up paying for multiple systems that essentially do the same thing—duplicating costs without realizing it. This is another area where businesses can bleed money unnecessarily.
In today’s market, consumer apps are popping up that help people cancel unused subscriptions. We’re starting to see the same thing in the commercial space. Companies are taking a hard look at software redundancies, trimming excess, and optimizing their operations.
A Smarter Approach to Business Costs
What can we take away from all of this? Whether you’re managing your inventory or your software, stepping back and doing a thorough evaluation can uncover major inefficiencies. The key is to audit what you have—whether it’s products, software, or other resources—and decide what’s truly necessary.
When you eliminate the waste, you free up space—both physically and financially. That allows you to invest in growth, innovation, or simply improving employee satisfaction.
At the end of the day, taking a proactive approach to managing your resources—whether inventory or systems—can make all the difference. It’s about more than saving money. It’s about running a smarter, more efficient business. If you’d like to explore how CFO On The Go can help you optimize your business, feel free to reach out to me at (737) 314-0060.