Invest the time necessary to increase your understanding of business income statement and financial statement analysis. The first thing to learn is the various terms used in this field. Every subject has its own set of key terms that are central to all discussions. Learn these items first to improve your understanding.

Focus on the terms that are used in popular media and financial news shows as a starting point. Write down the terms you are familiar with and expand this list to include five new terms a day. Follow the three steps below for more information on how to learn business income statements key terms.

1. Read online resources for business income statement key terms.

2. Study business income statement books.

3. Learn about income statement analysis.

Action Steps
The best contacts and resources to help you get it done

Check online resources for business income statement key terms

Review online dictionaries for an explanation of business financial statement terms and concepts. Many of the terms in a business income statement are commonly used in financial reporting. Look for a financial dictionary from a reputable source to learn the correct definitions.

I recommend: Purchase a small, ring bound book to keep track of the definitions of key terms as you learn them. Business income statement analysis relies on the understanding of key terms. Look at the resources available online, such as The Street or ET Financial. Both are reputable sources of information and provide detailed explanation of key terms, such as fixed asset. A fixed asset is a physical good or item that was purchased to assist in the business. The value of the fixed assets is the purchase price.

Review business income statement books on depreciation

Read post secondary financial analysis textbooks. Flip to the back and you will find a glossary of key terms and their definitions. The page the term is used is often provided in the glossary. Invest the time required to learn financial statement analysis software terms, as it will assist in the understanding and absorption of these concepts.

I recommend: Spend time to read these books and then apply them to financial statement analysis software. A commonly used term that can be found in financial statement software is depreciation. Over time, the value of an asset decreases, the book value on the financial statements needs to reflect this decrease in value. There are several methods of depreciation, including straight line and double depreciation. Study Business Town and Principles of Depreciation to learn more about financial statement analysis and depreciation.

Expand your knowledge of income statement analysis and equity

Take a course in analyzing income statements to learn important terms. The introductory courses start slowing and allow time to absorb the complex concepts and terms used in financial statement analysis. Upon completion, you will have a wealth of options and information at your fingertips and will be able to discuss your financial statement with key staff and your accounting services firm.

I recommend: Study the terms used in an income statement business analysis, like owner's equity. On an income statement, the owners equity is the funds deposited in the business by the owner. The value shown here represent cash deposits. Any funds withdrawn from the business for the owner, other than salary is taken from owners equity. At the end of every year, the net income is added here. Read the information provided by Western Illinois Entrepreneurship Center or US Security and Exchange Commission to learn more.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Understanding the terms and concepts used in a business financial statement are critical to your business. Lack of understanding increases the risk of accepting poor advice and losing money.

"Profit" is one of the most malleable and amorphous terms in business. Exactly what the word means can vary according to the purpose for which you're asking the question. Generally speaking, profit refers to the amount of money left over after you've subtracted your costs from your revenues. But what exactly do those "costs" entail?

Again, it depends. If you're calculating profit to figure out your tax liability, you typically want to minimize your profit to reduce your taxes, so you'll be subtracting as many costs as possible. But if you're getting ready to sell your business, you usually want to maximize profit to increase your sale price, so you'll likely be backing out as many of the variable costs as you can to make the company look more appealing to a prospective buyer.

When it's just you and the numbers alone in your office, and you're trying to figure out whether the business is really making any money, and if so, how much, you'll probably want something in the middle. In general terms, there are at least three times during the growth of your business when you'll want to calculate your profit.

1. At the start, when you're setting prices
2. Each year, as you budget and make projections
3. As you're planning your exit from the business

Action Steps
The best contacts and resources to help you get it done

Think profit from the start

Early in the startup process, you need to set your prices. But you need to make sure that you've built in enough of a margin (profit as a percentage of sales) to keep your business afloat. Once you do that, you should next figure out how long it will take before you've covered your startup costs and begin making a profit.

I recommend: Try some worksheets from Entrepreneur.com for step-by-step guides to profitable pricing and breakeven analysis. Also, contact your local Small Business Development Center (SBDC) for free educational seminars on starting and running a profitable business. Find the SBDC near you.

Keep profit in mind as you grow

Once you're up and running, it's important to sit down regularly to make sure your company is profitable, and then make the necessary adjustments if you find that it isn't.

I recommend: For a helpful profit-and-loss projection worksheet, check out Inc.com. Access to the worksheet requires free registration. You can also use software packages, such as Quicken or QuickBooks, to track profitability; download trial versions of Quicken and QuickBooks.

Make sure projects are profitable

Companies that work on a project-by-project basis — for instance, those involved in design, construction and architecture — need to ensure that each project they take on will make a profit.

I recommend: For a worksheet on how to calculate project profitability, check out this article at Inc.com. Access requires free registration.

Calculate the value of your business

Often, when business owners are trying to gauge profit, it's because they need to perform a business valuation. Again, the precise definition of profit here depends on the purpose of the valuation: to sell the business, to obtain financing, to prepare for tax season, to create a succession plan, to settle a divorce, etc.

I recommend: You can find information about various business-valuation methods at eBizBrokers.com and American Express. To make some rough valuation estimates on your own, check out these calculators from cdnbx.com and Dinky Town. To find a qualified business appraiser near you, try the Institute of Business Appraisers.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  You don't necessarily need fancy spreadsheets to calculate profit: sometimes pen and paper are your best bet.
• •  Don't confuse profit with cash flow: just because you have cash on hand doesn't mean you're making a profit. (On the other hand, just because you're cash-flow positive doesn't mean your business is profitable, either; you need both for sustainability.)
• •  Be sure to give your employees an education about profitability: the more they know about how your business makes money, the better they'll be able to help you make it happen.

Write out a list of financial information that you require from your financial statement analysis software. The income statement report is critical to the effective management of your company. Using financial statement software, the important information is accurate, reliable and at your fingertips.

Discuss your needs with your finance staff or your accounting services firm. Review the list of options available with your current accounting software tool and explore the other methods and software products available to meet your needs. Follow the three steps below to expand your knowledge of financial statement software.

1. Attend a course in financial statement analysis.

2. Review business income statement information.

3. Investigate business income statement software.

Action Steps
The best contacts and resources to help you get it done

Schedule a course in financial statement analysis

Increase your understanding of the business financial statement with a post-secondary course on the business income statement. These courses are available from a wide range of colleges and business schools. Ensure that the courses meet the requirements of the CPA, as these will provide a minimum level of quality assurance of the materials covered.

I recommend: Sign up for an accounting course from the Accounting Coach or Harvard Business Online. Both courses cover all the material necessary to understand business financial statements and to ensure you have the ability to perform and review financial statement analysis. These documents are critical to decision making for the success of your company.

Read more about the business income statement

Invest the time to read about the business income statements basics. This report is one of the key financial statement reports used to manage a business. Reading an income statement correctly and performing basic analysis yourself is critical to developing a business plan for the future and ensuring the ongoing financial health of the business.

I recommend: Sit down with the income statement produced by your accounting system and go over each line to improve your understanding of where the money is coming in and going to. Business Town provides an overview of the income statement and what is included. Analysis One provides several income statement analysis software products as well as a great diagram of how these statements work together.

Look at business income statement software

Investigate income statement analysis software to decide which programs work best for your firm. Make a list of your requirement, the amount of date you have and the number of income statement accounts. Review the program details with your accounting staff to assist in the software selection process.

I recommend: Confirm the selected software product is able to meet your basic needs for analyzing income statements and discuss training sessions with the software provider. Spreadsheet Store provides a list of income statement template and financial analysis software products that can meet your needs. Planmagic provides income statement analysis software products.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  The ability to read and correctly analyze a business financial statement is an important skill. Ask your accounting services firm to assist in the selection of key staff in your firm.

No matter what the business is, it is imperative that income statement analysis is performed by a company's accounting department. This will give the true measure of how and where a company is earning their money as well as where they are spending it.

If you own a small business, take the time to understand how to read a business income statement so that you can strategize, plan and grow your business based on the numbers. Here are several places, along with links, which provide further information on where you might educate yourself on reading business income statements.

1. Enroll in a collegiate level course that covers income statement analysis.

2. Take a seminar that specializes in learning how to read a business financial statement.

3. Go through a tutorial for financial statement analysis software as a way to educate yourself on business income statements.

Action Steps
The best contacts and resources to help you get it done

Take a collegiate level course that covers financial statement analysis

Any college accounting program is going to offer courses that cover how to read a business income statement and how to analyze other commonly used documents. Take a college course in the school of accounting. Even if you are not majoring in accounting, a beginning course will help educate you on how to read a small business income statement so that you can apply the knowledge to your own business.

I recommend: Visit the website for Montclair State University for further information on the "Fundamentals of Accounting" course they offer toward an undergraduate accounting degree. Reading business income statements are covered in that course. The Culver School at the University of Alabama also offers an accounting course, which covers reading a business income statement. It is found in the "Financial Reporting and Analysis of Business Activities" course.

Locate and enroll in a seminar that covers financial statement analysis

There are many seminars offered in the area of accounting that are geared for business owners and other industry professionals who do not have an accounting degree. Take these seminar classes as a way to learn about the basics of accounting so that they may be applied to your business.

I recommend: Visit the website for Skill Path for more information on the accounting seminars offered by the company, inclusive of seminars which cover reading business income statements. Score also offers seminars for on accounting for "non-accountants."

Take a software tutorial as part of your business income statements education and training

Financial statement software is the backbone to any accounting department. It keeps track of everything from gross sales, to expenditures, to receivables and of course calculates all of that data to provide the user with a business income statement. Take the tutorial of your selected business financial statement software so that it can be seamlessly integrated into your accounting department.

I recommend: Visit the website for Home Biz Accounting. A manufacturer of accounting software, the company also offers a tutorial on how to use the software and incorporate it into your small business. Free Accounting Software is another quality resource, which offers tutorials on the free software provided on the company website.