In the article, what is the business activity statement and what are its objectives? We share that this financial statement, also known as profit and loss statement is a report that, based on a given period, shows in detail the income obtained, the expenses at the time they are produced and as a consequence, the profit or loss that the company has generated in said period of time.
This seeks to analyse this information and based on this, make business decisions. It is also very useful to give you a panoramic view of the behaviour that the company has had, that is, whether it has generated profits or not.
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What does this financial statement show?
In it you can find the difference between the total income generated by your company in its different modalities, either by selling goods, services, etc. and the expenses represented by the cost of sales, the cost of services, administrative expenses, financial expenses, tax payments, etc. The final amount resulting from the subtraction between your income and expenses is called utility.
Why is it important to know how to analyse a business activity statement?
The business activity statement is one of the main financial reports that every entrepreneur should look at as it works as a compass to guide themselves when making business decisions and controlling the company’s operations. This financial statement will tell you if the company is really being a business that generates profits and how efficient is the management of available resources. By having this information, you can analyse the financial situation of the company, the structure of your income and costs and in this way make more sustained decisions about the future of the company.
In the same way, when analysing the profit and loss statement, you can have the possibility of comparing the real performance of the company annually.
How do I interpret a business activity statement?
One of the most important data that you should review in the profit and loss statement is the first line which shows the income, also called sales. In this section you have the option to divide the data into the sales categories derived from your products or services offered as well as other income that you have as appropriate to the operation of your company.
It is possible to carry out an analysis of the income statement from two perspectives:
1) Analysing margins
Margins are calculated by dividing the total of one account by another to obtain a proportion, this is generally done with the total income to obtain the percentage that each of the expenses and / or costs represent of the total sales or income generated. For example, you can divide the operating profit by the total revenue to calculate the operating margin, which gives you a vision of the company’s profitability. This data indicates how much is being invested in the operation to generate income, that is, how efficient is the use of your resources.
In order to correctly interpret these margins, it is important that you have a benchmark against which to compare it with either an indicator of the industry in which your company operates or with a specific percentage that you manage internally according to your organisational goals and strategic planning. Analysing the margins of each of the main accounts will give you a more specific and complete vision of the adjustments and actions that you must carry out to make the company more productive and you can increase your net profit and therefore, profitability.
2) Identifying trends
Another way to interpret the income statement is to observe trends, this means making a comparison of the company’s performance during certain periods of time.
The most common analyses that are done in organisations are:
- a) Current year vs. Last year.
- b) Current semester vs. Previous semester.
- c) Semester vs. Equal semester of the previous year.
These indicators are considered short term and although they are of great value for decision-making, they do not provide a long-term vision of the trends that the operation of the company is following. It is advisable to analyse the last 3 or 5 years since this will give you more information and you can identify behaviours in each of the main accounts.
The income statement is one of the main financial statements and provides you with important information that will allow you to identify the level of efficiency your company is having in putting your income in perspective against your costs and expenses. By analysing and interpreting the other reports such as the balance sheet and the cash flow, which we will talk about in future articles, you will be able to have an integral vision of the financial situation of your company.
Although the cash flow allows us to take a daily look at the income and expenses of the business, with the Income Statement we can identify some key variables to improve and / or correct the performance of your business. This can only be observed by grouping your income and expenses according to their sources of origin and comparing them in different periods.
For example, if you prepare the income statements of your business for the last 12 quarters, you can obtain an x-ray of the evolution of your fixed costs and your sales costs as well as their influence on operating profit.
In the same way, you can project future sales or the impact of the acquisition of a machinery on your costs (operating and financial), to evaluate the different scenarios that could arise with this investment.
- Sales. Income from the business activity statement by selling products or services. Gross or total sales are subtracted from returns and discounts on sales, and then result in net sales.
- Cost of Sales. Show how much the merchandise or service you offer costs you. This includes prices of raw materials, supplies, labour, transportation costs and taxes.
- Gross profit. It is the surplus, product of the subtraction between net sales and the cost of sales. If the cost of sales is greater than net sales, the resulting amount may be entitled “Gross loss”.
- Operating expenses. Are those payments necessary for the business to function from the operational point of view (purchases and expenses of sales and business administration). Income statements generally show two categories of operating expenses:
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