You’re an expert at running your business, not analyzing financial numbers. But as a small business owner, you need to know how your decisions affect your company. By reviewing your accounting books, you can leverage data to grow your company. One important report to look at is the comparative income statement.
What is an income statement?
The income statement, or profit and loss statement, shows sales minus expenses. The top line is the total amount you earned in sales before subtracting any expenses. Then, business expenses are listed and deducted until you reach the bottom line, or net profit.
Think of the income statement like this: You start with a whole pie (your total sales dollars). Then, each business expense you have gets a piece of the pie. The last line shows what’s left after recognizing all expenses. The bottom line is your piece of the pie.
The income statement shows the effects your decisions have on the net income. By looking at individual statements, you see results for one accounting period. But, sometimes, you want to know long-term effects and compare more than one period. To do this, use a comparative income statement.
What is a comparative income statement?
A comparative income statement combines information from several income statements as columns in a single statement. It helps you identify financial trends and measure performance over time. You can compare different accounting periods from your records. Or, you can compare your income statement to other companies.
Usually, you organize a comparative income statement into two or three columns. Each column represents an accounting period. Amounts are listed in rows that correspond to a specific account. Put the most current year closest to the accounts on the left.
For example, you might have columns for 2017, 2016, and 2015 (reading from left to right). Or, you could compare months, such as July, June, and May. The column furthest to the left lists the names of your accounts.
A comparative income statement helps you with many accounting tasks. Here are just a few ways the statement benefits your business:
- Compare current amounts to past years
- See if performance has improved over time
- Figure out patterns in high and low sales months
- Calculate percentages of changes
- Show how your company compares to others when securing outside capital
Information on a comparative income statement helps you make smart business decisions. For example, you notice sales dip every May. The pattern tells you to step up your marketing efforts next May.
Looking at several references to compare financial figures takes time. Trying to locate information on different statements can be confusing and frustrating. A comparative income statement makes it easy to point out trends in performance. You don’t have to flip back and forth between individual documents.
Comparative income statement example
There is no standard comparative income statement format. The easiest way to create a comparative income statement is to list the accounts in the left column. Then, create columns for each accounting period with the most current closest to the left. Take a look at each example of a comparative income statement.
Comparing one business’s accounting periods:
Comparing accounting periods for two businesses:
As you can see, figures are easy to compare with this type of income statement. But, it can be hard to judge performance based on the numbers alone. To get a clear picture, you might need to do some simple calculations.
Comparative income statement analysis
To understand your financial data, do a comparative income statement analysis. There are two ways you can look at information: horizontal and vertical.
Each kind of analysis gives different insights into business performance. The analyses help you make sense of your comparative profit and loss statement and see patterns.
A horizontal, or time series, analysis looks at trends over time. You can see growth patterns and seasonality. When calculating growth, look at the percentage of change between accounting periods.
To find the percentage change, first calculate the dollar change between each period. Consider the following example of comparative income statement analysis. If you made $45,000 in 2015 and $50,000 in 2016, the dollar change is $5,000.
Then, divide the dollar change by the base year profit. In this case, the base year profit is $45,000 for 2015. The result is 0.11 ($5,000 / $45,000 = 0.11).
Multiply the result (0.11) by 100 to get the percentage of change. In this example, there is an 11% change.
Dollar Change = Amount of the Item in the Current Year – Amount of the Item in the Base Year
Percentage Change = (Dollar Change / Amount of the Item in the Base Year) X 100
The percentage of change shows how much net profit increased or decreased from one period to another. Enter the change in the base year column.
Here is the comparative income statement from the example above:
The following is a horizontal analysis on the comparative income statement:
A vertical, or common-size, analysis looks at the relative size of line items. It allows you to compare income statements from different-sized companies. To compare competing businesses, find the percentage of revenue for each line item.
To find the percentage of revenue, divide each line item by the revenue. Multiply the figure by 100 to get a percentage. The percentage of revenue tells how much profit you keep from every sales dollar you earn.
Here is the comparative income statement from the example above:
The following is a vertical analysis on the comparative income statement:
Why use comparative income statements?
As a small business owner, you need to measure performance. If you don’t, how do you know if the decisions you make for your business are working? Looking at a comparative income statement helps you analyze profitability over time.
You can use a comparative income statement to look at important financial figures. Patterns in past figures can guide you in the future. For example, you compare last year’s return on investment (ROI) to the current year. This tells you if the money you put into your business brings in a greater amount of income.
Comparative income statements can also reveal if your costs and revenues are consistent. Let’s say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By recognizing the increase, you can find solutions to reduce COGS.
Business investors use comparative income statements to look at different companies. The comparison helps them decide which business is a better investment.
I know—accounting is not the most exciting part of owning a business. But when you take the time to review your financial numbers, the end result can be eye-opening. You see the outcomes of all the work you put into your business and gain insight into which decisions will help you succeed.
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