8 Proven Facts – Explaining Income Statements for Small Business Owners
Explaining Income Statements for Small Business Owners
Many samll business owners and sellers think about exiting their business at some point, expecially those who may have been impacted by either the COVID-19 pandemic, fires, snow storms or other natural disasters.
Explaining income statements for small business owners to understand is not necessarily an easy task.
Most business owners aren’t finance professionals. They are focused on the day to day activities of their business and the expert operation of their specialized feild, instead of dealing with preparing financial statements. See my next post on preparing financial statements.
This doesn’t negate the necessity of understanding income statements. This is even more important when thinking about exiting a business.
See what I think are the key things investors and buyers look at when evaluating a business for sale.
Income Statement Key Line Items
Revenue
Anybody in their right mind running a business should want to know and keep a close eye on how much SALES or REVENUE their company is doing. Sometimes sellers get lost in what this figure is as well. It’s not only about how much you make, but how much you keep. That is what your company will be judged on primarily.
COS/COGS (Cost of Sales or Cost of Goods Sold)
Your cost of doing business is different from industry to industry and each industry has standard characteristics when it comes to COS or COGS as a percentage of Revenue. So buyers will be looking to see if your business is comparable relative to industry standards.
Gross Profits
Another item called gross profits, which will be scrutinized comparable to industry standards dependent on the volume of business you are doing. Your business will fall into a category based on size and capability which investors will be looking for.
Gross Profit Margin
Following what investors are looking at above, the gross profit margin just gives the gross profit as a percentage of revenue. Which is a good quick glance metric investors may ask about in conversation to get a feel for the numbers upfront (in their attempt to conserve time).
Operating Expenditure
Operating expenditure is a crucial topic which managers are tasked with keeping under control because as you can see the dollars seem to be shrinking the lower down the report you go. So the efficacy in which these funds are managed is really important for an investor to identify, because it speaks to the quality of your management. Also, it may indicate whether there is a need for an infusion of working capital.
Capital Expenditure
CAPEX is similarly crucial to the management teams, but mainly for asset heavy businesses (companies with their operations reliant on Plant, Property and Equipment), managers have to closely monitor their working capital needs if PP&E is involved to produce operating income. There are also tax situations, depreciation situations and financing situations which may have to be considered for the business to be attractive for sale.
EBITDA
Earnings before interest tax depreciation and amortization is just what it means. It is the earnings of the company relative minus the interest needed to repay loans, tax remittances to the government, the depreciation of assets and amortization of loans which in most cases can be managed post acquisition of a company by creative restructuring of operations and cash management. Therefore investors prefer to see this metric and derive their valuations from this number.
Net Income
After all is done, Net Income is the money you are left with after considering any other income and other expenses, which may have arisen from the gain or a loss, for example, due to the sale of assets. Ultimately it’s the money that is yours at the end of doing business. Although this can either be retained or distributed by the company.
“Also….. Do you have an accounting cloud solution to help you get this done?”
In Closing
Whether you have a CPA or an accountant for your business dedicated to looking at the day to day, weekly or monthly numbers, it is worth your while to understand the items listed above.
I can guarentee you that these questions are coming your way sooner than later. Investors and buyers really detest waiting on these items. They want to see it up front and as clear as day.
Anything other than that would be seen as smoke and mirrors. So it helps a lot to make things as easy as possible for investors and buyers to review.
Related Articles
Data Processing and Hosting Services
The Data Processing and Hosting Services industry provides infrastructure used for a variety of information technology (IT)-related activities, ranging from online hosting to automated data entry services.
Over the five years to 2021, businesses have increasingly outsourced their IT infrastructure needs, directly benefiting industry operators.
The advent and popularization of cloud computing, one of the industry’s fastest-growing product offerings, has similarly led to greater demand.
As a result, the industry has fared well during the majority of the five-year period, with revenue expected to grow at an annualized rate of 5.0% to $196.5 billion.
However, the COVID-19 (coronavirus) pandemic is expected to lead to a decline in business investment in industry services, although this was tempered somewhat by increased usage of industry services in other capacities.
Industry revenue is expected to increase 1.7% in 2021, as the overall economy recovers from the economic fallout of the coronavirus pandemic.
Profit is expected to decline slightly over the five years to 2021, as growth earlier in the period is countered by declines in later years.
Beef and Pork Wholesaling
The Beef and Pork Wholesaling industry has experienced favorable conditions over the five years to 2021.
The industry, which serves as the middleman between beef and pork producers and retailers, is expected to perform well as both consumer spending and consumption of beef and pork rises.
Prices of key inputs, such as corn and diesel, have risen during the five-year period, increasing operating costs.
Although operators have dealt with recent studies linking beef and pork consumption to heart disease and shifting consumers’ tastes, the industry has shown resilience as operations have expanded.
Revenue has been on a steady growth during the five-year period.
However, the restrictions placed on the economy as a whole due to the COVID-19 (coronavirus) pandemic led to a decrease of 0.9% in 2020.
This contraction in revenue was offset by the increase in per capita disposable income as a result of enhanced employment benefits and stimulus checks.
As the economy begins to reopen in 2021 and the easing of restrictions occurs, consumer spending is expected to increase due to pent-up demand.
Consequently, research estimates industry revenue to increase at an annualized rate of 2.4% to $91.4 billion over the five years to 2021, with a 2.0% growth in 2021 alone due to the expected economic rebound.
Beer Wholesaling
Revenue growth for the Beer Wholesaling industry has been hindered by shifting alcohol consumption trends among consumers, particularly millennials.
Americans have been consuming less beer and opting for alternative alcoholic beverages.
However, the industry has continued to benefit from laws that prevent the vertical integration of breweries and retailers.
After the Prohibition era, nearly every state enacted a three-tier distribution system, requiring three distinct levels within the alcoholic beverage supply chain, including producer, distributor and retailer.
As a result, beer wholesalers have a protected role, purchasing beer from producers before storing and transporting it to downstream retailers.
Research estimates that industry revenue has grown at an annualized rate of 2.3% to $82.9 billion over the five years to 2021.
Since 2020, the COVID-19 (coronavirus) pandemic has resulted in rising demand for industry operators, with revenue projected to rise 1.0% in 2021 alone.
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