When you apply for a small business loan, an income statement from the last three years is usually one document you need to produce. Here are the details you need to know to calculate this financial document for a lender.
Investopedia gives an easy-to-understand outline here:
An income statement is a financial statement that reports a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.
Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a specific time period.
An income statement is also called a Profit and Loss Statement.
As a small business owner, you need to know how to prepare an income statement. This important document is key to determining your company’s sales revenue and the expenses incurred to make those sales happen. These expenses are also known as the cost of goods sold (COGS), which we’ll explain more later.
With a solid sense of your gross profit and operating expenses, you can also determine your company’s pre-tax income for a period. This number can indicate how well your company is performing compared to your projections or budget needs.
Additionally, through the details of an income statement, you can determine which factors are leading to your pre-tax income exceeding or surpassing your target and reshape your budget accordingly. Beyond your company, investors, banks, and other lenders may request to see income statements to determine whether your company makes for a trustworthy borrower and establish just how much money they can lend you.
Take the following steps to prepare an income statement:
The amount of money in all your accounts at the end of the period for which you’re generating financial statements is known as the trial balance. You should start by noting all your trial balances and then make calculations.
Add the values of all revenue line items in your trial balance. The sum that you calculate will be the revenue line item in your income statement.
As described earlier, COGS comprises direct costs, so for this step, you’ll note the value of any direct costs during the period in question. You’ll then add all these amounts together to get your COGS line item. Place the value you determine directly below the revenue line item.
With your revenue and COGS line items determined, you can calculate your gross margin. The formula is simple: Your gross margin is the difference between your revenue and your COGS. Learn more about gross margins via the SmartBiz Loans Small Business Blog: What Is a Good Profit Margin for a Small Business?
When you look at your trial balance, you should see line items for expenses beyond direct costs. These are your selling, general, and administrative expenses. Add them together, then create a new line on your income statement for this item.
If your company repays loans monthly, you’ll need to add interest expenses as a line item. Your trial balance should tell you how much interest your company has paid during the period in question.
After adding your interest line item, you’ll need to add depreciation and amortization line items to reflect how your assets lose value as they age. The following Inc. article can help you with depreciation and amortization: How to Calculate Depreciation and Amortization.
Now that you know all your indirect expenses, you can subtract them from your gross margin to calculate your pre-tax income. You should list your pre-tax income as a line item near, but not directly at, the bottom of your income statement.
Often, you can determine your company’s income taxes using simple multiplication. For example, if your company is a corporation, its income tax rate is 21 percent. As such, if your pre-tax income is $100,000, then your income tax is $21,000. Record this number as a line item below your pre-tax income.
Your net income is simple: It’s the difference between your pre-tax income and your income tax. Thus, if your pre-tax income is $100,000 and your income tax is $21,000, your net income is $79,000. Your net income should be the very bottom line item of your income statement.
Data presented with no context lacks meaning, and that’s why income statements include headers. In your header, you should indicate that your document is an income statement, include your company’s name, and state the period that the statement covers. Only after this step should you consider your income statement complete.
An income statement that follows all the above steps might look like this:
Your Business Name
Income Statement Q4 2020
Creative and proactive, business owners wear multiple hats. Sometimes finances are not in their wheelhouse. Luckily, there are plenty of resources available to help you craft an income statement for a lender. Reach out to your accountant, bookkeeper or another financial professional who can run the numbers for you. Additionally, the SBA’s Small Business Development Centers can provide assistance. Find your local center here.
If you’re seeking a small business loan, have these documents on hand.
An income statement doesn’t tell the whole story of your business. If you’re applying for a loan, there are other items and financial ratios considered.
Consider applying for an SBA loan, the “gold standard” in small business loans. These low- loans have low-rates, long terms and very low payments. SBA loan proceeds can be used for working capital, hiring, marketing, to pay off high interest debt, commercial real estate purchases and more