How to Calculate Business Income When Applying for Funding

26
November 2019

It goes by many names: profit and loss statement, P&L, income statement, earnings statement, revenue statement, operating statement, statement of operations, and statement of financial performance. But no matter what name you choose to use, you’ll be referring to one thing – a summary of your business revenues, costs and expenses for a specific period of time, typically a year or a fiscal quarter.

You might think a profit and loss statement is something that only corporations have to worry about. Not true. It’s an essential part of any business plan, and it’s a great way to gauge how your business is doing.

Components of a profit and loss statement

Profit and loss statements are easy to understand and relatively easy to calculate. They begin with a basic summary of your revenue, break down various costs and expenses, and conclude with your net profit.

Revenue is the money you are bringing in from your business activities.

Costs, also known as Direct costs” and “Cost of Goods Sold (COGS)” are the costs associated with making products or delivering services. This does not include business expenses such as rent or payroll. Instead, it would include printing costs if you sell photographs, or the wholesale price of goods you sell in a gift store. And cost directly attributable to sales or the delivery of your services is listed in this section.

Gross margin is calculated by deducting your costs from your revenue. This figure shows the amount of money you have to cover business expenses after paying costs for your products or services. You can calculate your gross margin percentage by dividing your gross margin by your revenue. This percentage shows you how much you spend on products/services. The higher your gross margin percentage, the better.

Operating expenses are what you pay to keep your business running, apart from your Costs (see above). This would typically include rent, utilities, payroll, marketing, necessary business travel and other essentials. It does not include your taxes or any interest you are paying on loans.

Operating Income (your “EBITDA” - earnings before interest, taxes, depreciation, and amortization) can be calculated by subtracting your Operating Expenses from your Gross Margin.

Interest are the payments you might be making on loans.

Depreciation and amortization are related to company-owned assets and indicates the loss in value that affects such assets over time. For example, your vehicles will decrease in value due to normal wear and tear over the years.

Taxes is obvious, this is where you list your tax costs.

Net profit is your bottom-line number. It is what remains of your business revenue after you subtract all your necessary expenses. Hopefully, your profit is a healthy number, but it can indicate impending business profitability problems or even losses.

You can go one step further and calculate your net income percentage (also called your “profit margin” by dividing your net income by net revenue and multiplying your result by 100. This gives you an easy way to track profit margin over time. It’s usually good news if your profit margins trend up. A good profit margin can be anywhere from 11%-20%, depending on the type of business you run and your industry. You can get a general idea of what your profit margin should be by Googling “Profit margin for {my industry]” replacing “my industry” with whatever field you work in – such as restaurants, art gallery, clothing, and so on.

How to improve a profit margin?

You can reduce expenses or increase the products and services you offer.

Cut expenses: a long look at your profit and loss statement should reveal any areas where you are spending unnecessarily. Keep your overhead as low as reasonably possible.

Reduce direct costs: You should also check to see if any of the products and services you offer are underperforming and consider whether you can cut the direct costs of that product/service. You may also decide to drop unprofitable products and services.

Increase products/service offerings if you can do so without raising overhead expenses to a point where its not profitable. Getting working capital funding can help you grow your business without growing your overhead expenses past the point of profitability. You’d use the funds to increase sustainable streams of revenue, which grow your profits over the associated costs of the funding.

Alternative Funding Options

If your business income doesn't qualify you for a bank loan right now, and if you need working capital sooner rather than later, consider looking into alternative funding sources. These funders offer options – such as equipment loans and invoice factoring - designed to meet the needs of smaller businesses. Business owners don’t need to have perfect credit scores to be approved, alternative lenders are more concerned about your ability to pay now than your past credit history. And the application and approval process typically takes minutes, not months.

One easy way to get the process started is by getting pre-qualified by One Park Financial, a company that focuses on helping owners of small and mid-sized businesses access funding. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.