APT Initiatives
APT Business & Economics Resources
Minimising Workloads, Maximising Performance
Established in 1999

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Income statement (or profit and loss account)

A statement showing the net income (or profit) of a business within a trading period ie revenue less all its costs / expenses. As the amount of profit a business makes is of vital importance to the owners / shareholders, measurement of how well a business is performing in relation to profit is essential. Consequently, businesses produce income statements in order to help monitor and control performance. It is also a legal requirement as businesses are required to pay tax on any profits made. Let us consider this in a little more detail. The main objective of all businesses and the fundamental task of management (at least in the private, profit making sector) is to make or, even, maximise profit. An income statement / profit and loss account is vital to: determine whether or not the business is profitable in a given year; assess how effectively costs are being managed within the business by comparing the amount of gross or net profit made to sales turnover (gross and net profit margin); make profit comparisons with one year and the next, and thus, assess the success of new strategies in increasing the profitability of the business and / or identify the need for change(s) (in the case of a loss or falling profit situation); assess the business’s profit performance in relation to competitors and, ultimately, indicate whether or not there is room for improvement. Banks will specifically use the income statement (profit and loss account) to determine the business’s ability to meet interest payments. The higher the ‘profit before interest’ figure, the greater the feeling of security the banks will have that any money borrowed will be able to be repaid. (Ideally, banks like this ‘profit before interest’ figure to be at least 3 or 4 times the level of interest paid / payable during the trading period).

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