The income statement shows the path of money from sales to profit. It starts with revenue, subtracts the cost of goods or raw materials, then deducts other expenses, and finally shows what you actually have left. It's the story of your month or year, told in numbers.
If the balance sheet is the snapshot of a day, the income statement is the movie of a period. Karen Berman and Joe Knight call this statement the most important story the numbers tell the owner, because it shows whether the business model works.
The film has four stations.
The first station is turnover, that is, everything you've sold during the period. Be careful, turnover is not the cash in the account. It's the value of sales, regardless of whether the customer has paid or not.
The second station is direct cost. Coffee, drinks, and food for a bar. Merchandise purchased for a store. Materials for a construction company. This cost rises and falls with sales.
The third station is gross margin. Revenue minus direct cost. This number shows how much each sale leaves you to cover everything else.
The fourth station is fixed expenses. Rent, salaries, utilities, internet, accounting. These are paid more or less the same whether sales are high or low. Gross margin minus fixed expenses yields the period's result, profit or loss.
Get a neighborhood bar for a typical month.
Monthly turnover: 1,200,000 LEK.
Direct cost, coffee, beverages, milk and supplies, 420,000 LEK.
Gross margin 780,000 LEK. As a percentage, 780,000 divided by 1,200,000 equals 651 TP3T.
Now the fixed costs.
Salary for two employees, including contributions: 350,000 LEK.
Rent: 150,000 LEK.
Energy, water, and internet: 50,000 LEK.
Accounting and small expenses: 30,000 LEK.
Total fixed expenses: 580,000 LEK.
Result. 780,000 LEK minus 580,000 LEK equals 200,000 LEK of profit before tax. Tax is then calculated on this amount according to the regime your business falls under. You can find the rates and thresholds explained in the Taxes cluster.
Note something important. If revenue falls to 151 TP3T, gross margin drops to 663,000 LEK, while fixed costs remain at 580,000 LEK. Profit shrinks from 200,000 to 83,000 LEK. This is why the two middle stations—direct costs and gross margin—deserve your attention every month.
At the Resource Center you'll find a simple income statement template in Excel, with four ready-made stations and the margin calculated automatically. You just need to enter the month's figures. You can find it at Resource Center.
The performance statement is presented with an expenditure classification by nature or by function, and the detailed format is specified in the relevant SKK for the presentation of financial statements. For microentities reporting under SKK 15, Article 5 of Law No. 25/2018 provides for a simplified presentation.
The professional value for the small client lies in the strategic reorganization of the tax return. The statement by nature does not show gross margin as a separate line item, so a reorganized statement in the format of contributions, revenues, variable costs, contribution margin, fixed costs, and profit gives the owner the break-even point with a single calculation. The break-even point is obtained by dividing the fixed costs by the percentage margin. In the above example, 580,000 divided by 0.65 yields about 892,000 LEK in minimum monthly revenue. This is perhaps the most useful number an economist can give a small bar owner.
The two areas between turnover and profit. Either direct costs have risen faster than sales, so the gross margin has fallen, or fixed costs have ballooned. The statement pinpoints one of the two.
It depends on the business. In a bar with permanent staff, they're treated as fixed costs. In a construction company, the site workers' wages are a direct project cost. The important thing is to allocate them accurately once and keep them that way.
If you'd like to see your dashboard reorganized in this format, with your coverage point calculated, take a look at our packages at offer.
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