The Income Statement: Are You Making Money?

See it happen

Before the words, watch the shape. Revenue comes in at the top and each cost peels a slice away until net income is what’s left.

The staircase, one step at a time

The statement starts with every dollar you earned, then subtracts costs in a deliberate order. Each step down tells you something different about the health of the business.

• Revenue is the top line: every dollar from selling, before anything is taken out. The size of the pie before anyone takes a slice.
• Cost of goods sold (COGS) is what it directly costs to deliver each sale. Beans and cups for a café, hosting for an app, materials for a workshop. Subtract it and you get gross profit.
• Operating expenses are the costs of simply existing: rent, marketing, salaries, software. They show up even in a month where you sell nothing. What survives them is operating income.
• Interest and tax come last, because they’re about how the business is financed and taxed, not how it runs. What’s left is net income, the famous bottom line.

A worked example

Here’s the whole staircase with real numbers, for a small bakery in a decent month:

Read the staircase and the story writes itself: the bakery keeps 60 cents of every sales dollar after ingredients, the core operation earns a healthy $6,000, and after financing and tax the owner truly nets $4,125. Three different profits, three different insights.

The trap to watch for