Let’s take a minute to talk about your company’s income statement. The income statement, by determining profit, measures the success of your company’s operation over a given period of time. Plainly put, the ability to consistently generate profits is the ultimate indicator of your company’s viability.

The income statement is divided into two sections, revenue, the money generated from the sale of goods and services, and expenses, the money it costs you to generate those goods and services. The dollar difference between these two sections is called net income, earnings or profit.

Revenue and expenses are generally divided into sub-categories so that investors can more easily understand how businesses generate revenue and incur expenses. For example, if your company generates revenue by selling products and providing services it is a good idea to show an investor how much revenue comes from each source.

Likewise, expenses are generally incurred in two ways, those directly associated with providing goods or services such as raw materials or labor, generally referred to as direct costs, and those associated with supporting operations such as rent and management salaries, typically referred to as indirect costs. The sum of all direct costs is referred to as cost of goods sold, sometimes called COGS for short. The sum of all indirect costs is typically referred to as overhead.

An investor will want to see your income statement broken down into the appropriate revenue and cost categories so that they can determine your gross margin, revenue less cost of goods sold, and understand how much of that is required to support overhead before delivering a return in the form of profit.

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