Understanding Operating Statements
An operating statement — also called an income statement or a profit and loss (P&L) statement — shows how well a company performed financially over a certain period. It’s basically a summary of all the money that came in (revenue), all the money that went out (expenses), and whether the company made a profit or took a loss.
These statements are crucial for all sorts of things. They help companies make smart decisions, keep costs under control, track growth, figure out how profitable they are, create budgets, and stay transparent. Investors also rely on them to understand the company’s financial health before deciding whether or not to invest.
In this article, we’ll dig into all the different parts of an operating statement, how they’re used, how they differ from other financial reports, common mistakes to avoid, and how automation can help.
Understanding the Operating Statement
An operating statement is a financial tool that can show you how well a business is doing. It’s used to evaluate a company’s operations and current financial standing by tracking revenue, expenses, and profit or loss over a set period of time.
You might hear an operating statement referred to by other names, such as:
- Income statement
- Profit and loss statement (P&L)
- Statement of earnings
- Statement of activities
Why is an operating statement essential?
Operating statements give you a lot of valuable insights that can help you make smart decisions about your business. For instance, these statements can guide strategic decisions about:
- Pricing
- Cost management
- Investments
Operating statements can also help you identify areas where you might be able to reduce costs, and they’re useful for keeping track of revenue growth and profitability trends.
Key Elements of an Operating Statement
An operating statement, at its heart, is a story told in numbers. It details how a business performed over a specific period. To understand that story, you need to know the key players – the core elements that make up the statement.
- Revenue: This is the top line, the grand total of income generated from the company’s main activities. Think sales revenue from products sold, service revenue from providing a service, or subscription revenue from ongoing memberships.
- Cost of Goods Sold (COGS): This represents the direct costs involved in producing those goods or services. It includes things like raw materials, the labor directly involved in production, and manufacturing overhead.
- Gross Profit: Simply put, this is your revenue minus your COGS. It shows how much profit you made before considering other operating expenses.
- Operating Expenses: These are the costs of running the business, excluding the direct costs of production (COGS). Common examples are Selling, General, and Administrative expenses (SG&A), rent, utilities, and employee salaries.
- Operating Income: This is your gross profit minus your operating expenses. It gives you a picture of how profitable the core business is.
- Non-Operating Income/Expenses: These are income and expenses not related to the core business. This could include interest income earned on investments, interest expenses paid on loans, or gains/losses from selling investments.
- Income Before Taxes (EBT): This is your operating income plus any non-operating income or expenses. It’s your profit before you pay income taxes.
- Income Tax Expense: This is the amount of income tax the company owes to the government.
- Net Income: Finally, this is the bottom line: your income before taxes minus your income tax expense. It’s the company’s profit after all expenses and taxes have been paid.
By understanding these elements, you can begin to analyze an operating statement and get a feel for the financial health of a business.
Statement of Operations vs. Income Statement
You might hear the terms “statement of operations” and “income statement” used interchangeably. That’s because they essentially are the same thing.
Both financial statements show a company’s revenues, expenses, and ultimately, its profit or loss over a specific period.
The difference really comes down to jargon. Different industries and regions might prefer one term over the other. Also, the exact way the information is presented might vary slightly.
But the key thing to remember is that they both serve the same main purpose: to give you a snapshot of a company’s financial performance.
Practical Applications of Operating Statements
Operating statements are useful in a wide range of financial activities.
Performance Evaluation
An operating statement can help you assess your company’s overall financial health and pinpoint areas where you could make improvements.
Investment Decisions
If you’re trying to attract investors, an operating statement can showcase your company’s profitability and provide a data-backed basis for valuation.
Benchmarking
You can use operating statements to compare your company’s performance against others in your industry and to identify any competitive advantages or disadvantages you may have.
Budgeting and Forecasting
Operating statements provide historical data that you can use to project future performance, set realistic financial targets, and monitor your progress toward those goals.
Common mistakes when preparing operating statements
Operating statements are pretty straightforward, but it’s still easy to mess them up. Here are some common mistakes to avoid:
- Misclassifying expenses. If you put an expense in the wrong category, it can paint the wrong picture of how profitable your business really is.
- Ignoring the big picture. The operating statement doesn’t tell the whole story. You also need to look at the balance sheet and cash flow statement to get a full understanding of your business’s financial health.
- Not comparing budget versus actual. It’s important to compare your actual results to what you budgeted. This helps you see where you’re doing well and where you need to improve.
- Not reviewing often enough. You should be looking at your operating statement regularly to stay on top of things.
The role of automation in operating statements
Generating an operating statement is typically a labor-intensive task. Fortunately, automation can help streamline the process.
Accounts payable (AP) automation
Automating your accounts payable can streamline the entire AP process and reduce the amount of manual data entry, which cuts down on errors.
Benefits of automation
Automating the operating statement process can cut your month-end close time by as much as 25%. It also improves accuracy and efficiency. By automating the process, your finance team can spend less time on generating the statement and more time on strategic finance activities.
Strategic finance integration
Automation can free up your finance team to focus on planning, analysis, and decision support. This improves your operational efficiency and, ultimately, your profitability.
In Closing
In short, operating statements are essential for understanding a company’s financial health and making good decisions about the future. Preparing them carefully and reviewing them regularly is key.
To get the most out of your operating statements, avoid common mistakes and consider using automated tools.
When done right, operating statements provide a clear view of profitability. That view helps businesses make strategic decisions, achieve their financial goals, and create value that lasts.