As the founder of a startup, having a solid grasp on your business’s financial health is vital to making intelligent decisions about its present and future. Reviewing and comprehending the three basic financial statements is the key to that understanding.
The three basic financial statements are the income statement (or profit and loss statement), the balance sheet, and the cash flow statement, each of which provides a different perspective on your business’s financial health and—when reviewed together—paint a useful big-picture view of the financial health of your business.
A common source of confusion for first-time founders centers on the income statement vs. profit and loss statement, so let’s begin by taking a look at those terms.
Income Statement Vs. Profit And Loss Statement
One of the most fundamental questions first-time startup founders have about the three basic financial statements is, “Is profit and loss the same as income statement?”
Fortunately, the answer to this one is exceptionally simple: Yes, they’re the same thing. With that in mind, we’ll be using the terms profit and loss (P&L) and income statement interchangeably from here on out. This statement is sometimes alternatively referred to as the statement of revenue and expense, or the statement of operations, but since those terms are significantly less common, we won’t use them again here.
Now that we have that clarification out of the way, let’s go into a bit more detail about what the income statement—or profit and loss statement—is and how it works.
By monitoring the data in your income statements over time, you can gain an understanding of the trajectory of your business’s financial performance, set and keep track of goals, and identify problem areas.
What is the income statement?
An income statement summarizes the business’s operations during a given financial period (usually a month, quarter, or year). It’s the most commonly used financial statement across businesses of all sizes and is generally considered the most important of the three basic financial statements, as it shows the company’s ability (or inability) to generate profit over a period of time.
Additionally, you can use the data contained in the P&L statement to measure the business’s profitability according to commonly used profitability ratios like profit margin and gross margin ratios.
The basic equation on which the income statement is built is:
Income = (Total Revenue + Gains) – (Total Expenses + Losses)
In this equation:
- Revenue is the money the company receives from normal business operations—that is, sales of the primary products or services you offer customers.
- Gains are any economic benefit outside of normal business operations, for instance, the sale of a long-term asset for more than the amount shown on the company’s books.
- Expenses are the economic costs of earning revenue, for instance, rent, employee wages, utilities, etc.
- Losses are economic costs incurred outside of normal business operations, for instance, the sale of a long-term asset for less than the amount shown on the company’s books.
By monitoring the data in your income statements over time, you can gain an understanding of the trajectory of your business’s financial performance, set and keep track of goals, and identify problem areas. For a more detailed explanation of P&L statements and how to read and interpret them, check out our blog post on the topic.
Zeni makes your startup’s finances make sense.
For first-time founders, keeping up with your company’s accounting necessities can be a frustrating distraction that saps productivity and makes it more difficult to run your business. Zeni solves this problem by combining cutting-edge technologies with a team of seasoned finance professionals to provide you with the world’s first AI-powered full-service startup finance concierge.
In addition to our team of experts, Zeni has harnessed advancements in artificial intelligence and cloud computing to automate once labor-intensive bookkeeping tasks and provide you with highly accurate, up-to-the-moment data and insights into your company’s financials, anytime and anywhere with the Zeni Dashboard.
With the Zeni Dashboard, startup founders can access beautiful, streamlined, interactive P&L, Balance Sheet and Cash Flow Statements on desktop or mobile, available 24/7.
Check it out in real-time by scheduling a demo with us today!