Small Business Income Statement: 2025 Complete Guide

Running a small business means keeping an eye on your money. You want to know how much you earn, what you spend, and whether your business is making a profit. One of the best tools to help you with this is an income statement. This report shows how your business is doing financially. It’s also called a profit and loss statement or P&L for short.

In this blog, we’ll explain what an income statement is, how it works, and why it’s so important for small business owners. We’ll also walk you through how to make one step-by-step. By the end, you’ll feel more confident about reading and using income statements in your business.

What Is an Income Statement?

An income statement is a financial report that shows the money your business made and spent over a certain period, usually a month, quarter, or year. The goal is to see whether your business made a profit or a loss.

It includes all the income (revenue) your business earned and subtracts all the expenses. What’s left over is your net income, your final profit or loss.

Why Is an Income Statement Important?

If you own a small business, there are many reasons to use income statements regularly:

• Track profit and loss: See how much money your business made or lost.
• Spot trends: Compare different months or years to spot increases or drops in income or expenses.
• Make smart decisions: Use the numbers to decide if you should cut costs, raise prices, or grow your business.
• Get loans or investments: Lenders and investors often want to see your income statement before giving you money.
• File taxes: An accurate income statement helps you report your income and expenses properly at tax time.

When Should You Prepare an Income Statement?

You can prepare income statements on a monthly, quarterly, or yearly basis. Many small business owners start by creating monthly income statements to stay on top of their money.

The best time to create one depends on your business size and needs. Some businesses look at income statements every week. Others check them once a month or each quarter.

Key Parts of an Income Statement

Let’s break down the main parts of an income statement so you know what each section means:

1. Revenue (Sales)

This is the total amount of money your business earns from selling products or services before any costs are taken out. It’s the top line of the income statement.

Example: If you sell cupcakes and bring in $5,000 from sales in one month, your revenue is $5,000.

2. Cost of Goods Sold (COGS)

These are the direct costs of making your product or service. It includes things like materials and labor used to produce what you sell.

Example: If your cupcake ingredients and packaging cost $1,500, that’s your COGS.

3. Gross Profit

This is what you have left after subtracting COGS from revenue.

Gross Profit = Revenue – COGS

Using our cupcake example:

$5,000 (Revenue) – $1,500 (COGS) = $3,500 (Gross Profit)

4. Operating Expenses

These are the day-to-day costs of running your business that aren’t tied directly to making your product. Examples include:

• Rent
• Utilities
• Office supplies
• Marketing
• Salaries for office staff

5. Operating Income

This is the money left after subtracting operating expenses from gross profit.

Operating Income = Gross Profit – Operating Expenses

If your gross profit is $3,500 and your expenses are $1,000, your operating income is:

$3,500 – $1,000 = $2,500

6. Other Income and Expenses

Sometimes businesses make or spend money outside of normal operations. This section might include:

• Interest earned on savings
• Interest paid on loans
• Gains or losses from selling equipment

7. Net Income

This is the most important number on your income statement. It’s your bottom line, the money your business really made (or lost) after all expenses.

Net Income = Operating Income + Other Income – Other Expenses

If your operating income is $2,500 and you paid $200 in loan interest, your net income would be:

$2,500 – $200 = $2,300

This means your business made $2,300 in profit during that time.

Step-by-Step: How to Make an Income Statement

Here’s a simple guide to help you prepare your own income statement:

Step 1: Choose a Time Period

Decide whether you want to prepare the statement for a month, a quarter (3 months), or a year.

Step 2: Add Up Your Revenue

List all income your business earned during the chosen time.

Step 3: Calculate Cost of Goods Sold

Add up all costs directly related to creating your product or service.

Step 4: Subtract COGS from Revenue

This gives you your gross profit.

Step 5: List Operating Expenses

Add up your rent, utility bills, marketing costs, and any other regular business expenses.

Step 6: Subtract Operating Expenses from Gross Profit

This gives you your operating income.

Step 7: Add or Subtract Other Income or Expenses

Include things like interest earned or loan payments.

Step 8: Get Your Net Income

This is your final number: profit or loss.

Sample Income Statement for a Small Business

Here’s a simple example of what an income statement might look like:

ABC Cupcake Co.
Income Statement for January 2025

Item	Amount
Revenue	$5,000
Cost of Goods Sold (COGS)	$1,500
Gross Profit	$3,500
Rent	$500
Utilities	$100
Marketing	$200
Salaries	$200
Total Operating Expenses	$1,000
Operating Income	$2,500
Interest Expense	$200
Net Income	$2,300

This simple table gives you a clear picture of how much profit the business made in one month.

Common Mistakes to Avoid

Here are some mistakes small business owners often make when creating income statements:

• Mixing personal and business expenses
• Forgetting to include all sources of income
• Not updating records regularly
• Leaving out hidden costs like taxes or bank fees
• Using wrong numbers or guessing instead of checking records

Avoid these errors by keeping your books up to date and using reliable accounting software.

Tools to Help You Create Income Statements

You don’t have to do this by hand. Many small businesses use tools like:

• QuickBooks
• Xero
• FreshBooks
• Wave Accounting
• Excel or Google Sheets

These programs help you organize income and expenses and generate income statements automatically.

How Often Should You Review Your Income Statement?

At the very least, you should review your income statement once a month. This helps you:

• See if your income is growing
• Spot high expenses
• Plan for upcoming costs
• Catch financial problems early

Frequent reviews also make tax time much easier.

Income Statement vs. Other Financial Reports

Your income statement is just one part of your financial picture. You should also know about:

• Balance Sheet: Shows what your business owns (assets) and owes (liabilities) at a specific time.
• Cash Flow Statement: Tracks how money moves in and out of your business.

Together, these three reports help you understand your business health and make smart decisions.

Key Ratios from Income Statements

You can use your income statement to calculate helpful financial ratios, such as:

• Gross Profit Margin = Gross Profit ÷ Revenue
  Helps you understand how well you manage production costs.
• Operating Profit Margin = Operating Income ÷ Revenue
  Shows how efficiently your business runs.
• Net Profit Margin = Net Income ÷ Revenue
  Tells you how much of your revenue becomes actual profit.

Tracking these ratios can help you grow your business over time.

Stay on Top of Your Business Finances

Income statements are powerful tools that every small business owner should use. They help you track profits, manage expenses, and make smart financial decisions. Even if numbers aren’t your favorite thing, using an income statement can make running your business easier—and more successful.

You don’t need to be an accountant to understand your income statement. But if you want help, there are experts who can take care of it for you.

At Global FPO, we specialize in helping small business owners like you stay on top of their finances. Whether you need help preparing income statements, managing your books, or planning for taxes, our team is here to support you. With professional bookkeeping and accounting services, we make sure your business stays profitable and on track.

Contact Global FPO today to learn how we can help your business grow with smart, accurate financial reporting.

FAQs

1. What is the difference between an income statement and a balance sheet?

An income statement shows what your business earns and spends over time. A balance sheet shows what your business owns and owes at a single point in time.

2. How often should I prepare an income statement for my small business?

It’s best to prepare one monthly. This helps you stay updated on profits and expenses and catch problems early.

3. Do I need accounting software to make an income statement?

No, but it helps. You can use tools like QuickBooks, Xero, or even Excel to make the process faster and easier.

4. Can I use my income statement to file taxes?

Yes. Your income statement helps you report your business income and expenses when filing taxes.

5. What if my income statement shows a loss instead of a profit?

A loss means your expenses were higher than your income. This can help you find areas to cut costs or improve your sales strategy.