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Alright, if you’ve been keeping up with my blog posts, you know we’ve covered a lot of the foundational bookkeeping items – why it’s important, what tools are the most helpful, and WHAT you should actually be doing.

Today, we’re going to take it a step further and talk about one of the end results of your bookkeeping efforts – reading the financial statements.

Even more specifically, we’re first going to look at one of the most common financial statements – your Income Statement. Maybe you’ve heard it called a Profit & Loss Statement, or P&L, but they all mean the same thing.

Understanding the Income Statement’s Purpose

The income statement shows a summary of all the money you earned & spent over a certain period of time. This is one of the primary reports you should be looking at each and every month to see how your boutique is performing financially.

This report will help you answer questions like..

“What were my total sales for the month?”

“What were my total expenses?

“Was I profitable last month?”

And so many more!

Understanding the Income Statement Layout

Your income statement will always have the same basic layout, no matter if you are a brick and mortar retailer, online only, or a mobile/pop-up boutique.

Just a quick note: I will be using some bookkeeping terms that I’ve previously introduced in past blog posts. The best one to refresh your memory is the one on Understanding the Chart of Accounts for Retail Businesses. You can read it again here.

Income Section

The top of your report will always be your Income section, and will include your gross sales, discounts, returns, and shipping income collected. At the bottom of this section there will be a subtotal that adds each of these items up. This total is known as your Total Sales, or Total Revenue.

Cost of Goods Sold

Immediately after your Income & Total Sales numbers, you will find your Cost of Goods Sold. Just a quick reminder, this is going to be the cost of the inventory that you just sold, not what you bought, just like the name suggests.

If you need a little better understanding on how to track your inventory vs cost of goods sold, you can check out this post.

Gross Profit

If you take your Total Sales number, and subtract your Cost of Goods Sold, you get your Gross Profit.

One of the most common mistakes I see is business owners expensing the inventory when they PURCHASE it, which will inaccurately represent your Profit Margin, so you will have no way to know if your current gross profit is enough to actually cover all your expenses.

Expenses

This section will likely be the longest section on your Income Statement. It lists out all the overhead expenses that you need to pay in order to keep your boutique running smoothly. Things like rent, utilities, employee wages, marketing costs, software, shipping supplies, and so much more.

PRO TIP: If you want a copy of my boutique-specific chart of accounts that lists out the exact expenses I use to group my client’s expenses together, you can grab your template here.

Net Operating Income/Profit

If you subtract all your expenses from your Gross Profit number, you’ll find how much money you made (or lost) from your boutique in the day to day operations.

Other Income/Expenses

At the end of the report there may be a section that allows for “other” income and expenses. These are maybe funds that you received through interest in a savings account, credit card rewards, or grant money you received.

They still need to be recorded, but they’re not really money you earned in the day to day operations. Instead of including these amounts in your Gross Sales number, it’s best to separate them out at the bottom so you can clearly see your boutique’s profitability based on your normal operations.

Net Profit – the “Bottom Line”

Finally, the very bottom number will add in any other income/expenses to your Net Operating Income to give you your Net Profit. If anyone ever wants to know what your “bottom line” is – this is the number they’re asking for.

If the number isn’t quite as healthy as you are hoping for, you can read this post to learn about 3 ways to help improve your profitability.

Understanding the Income Statement – Three Things to Review

Now that you know what’s in an income statement, let’s talk about how to use it to make better decisions for your boutique. When you’re reviewing your report, ask yourself questions such as:

Did I earn a profit?

Is your bottom line positive or negative? If it’s positive, you earned a profit. If it’s negative, you operated at a loss.

If you operated at a loss, you can start asking yourself questions about WHY that happened. Were your sales way down? Did you overpay for some advertising that didn’t provide the return you thought? Are you paying too many staff?

You may not know these answers right off the top of your head, but as you can see the data month after month, you might get some more clarity.

What is my profit margin?

One of the driving forces behind running a profitable business is having a strong profit margin. If you’re not charging enough for your products, you will never have enough to cover all your expenses.

To calculate your profit margin, you’ll need 2 numbers: your cost of goods sold (COGS), and your net product sales (gross sales – discounts – returns).

Let’s take an example:

Let’s say you had $100,000 in Total Net Sales ($115,000 gross sales – 10,000 in discounts – $5,000 in returns) for the period, and your Cost of Goods Sold was $40,000. Your Profit Margin is calculated as (Total Net Sales – COGS) / Total Net Sales, so in our example… (100,000 – $40,000) = $60,000, Then $60,000/$100,000 = 0.6, or 60% .

So what does that number ACTUALLY mean? It means that for every $1 you earn in sales, you have $0.60 available to pay your expenses. The other $0.40 is essentially set aside to replenish that inventory.

How does this month compare to prior periods?

One of my favorite things to do for clients is to look at how a current month’s numbers compare to the month prior, or even compare to the same month in a prior year.

The numbers tell a story. In today’s economy, it’s not uncommon for sales to be down when you compare November of this year to November of last year. But, it can be exciting and give you a little boost when you compare your sales from the holiday shopping in November to the summer slump in July.

Once you have more than one year of bookkeeping data to compare to, you can also start using your number to estimate what sales will look like next month, quarter, or year, and so you can use that to better plan out your inventory purchases.

It all starts with solid bookkeeping, and being able to read the financial reports that it creates.

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I hope you feel even just a little more confident in reading and understanding your income statement. I go a little more in depth on things you can review on your income statement in my free, on-demand masterclass, “Make Your Money Make Sense”. I’d love for you to register and take your learning a little further! You can register for free here.