An income statement (also called a profit & loss – or P&L – statement) is one of the three major financial statements that a startup needs. The others are the balance sheet and the cash flow statement. The three statements are crucial when trying to secure funding from venture capitalists, investors, and lenders. You’ll also need to provide them to your board of directors at your regular meetings.
The income statement shows how much a startup is spending, and how revenue the company is bringing in, over a specific time period. Typically startups in their initial stages have negative income, because the company is investing in building a new product. Even if revenue is zero, startups need to produce P&L statements! Listing the company’s expenses shows where the startup is spending money, and controlling expenses is one of a founder’s most important responsibilities.
The income statement is usually the first financial statement that a VC will look at when evaluating a startup. And experienced founders obsess over their financials, starting with this one, since it shows both revenue and expense performance.
As noted above, the income statement has two main sections: revenue and expenses. Revenues include any money the startup has earned, and expenses include all the money a company has spent on its business activities. The difference between those amounts is net income (or loss). An income statement covers a specific span of time, and are typically done monthly, quarterly, or annually.
We recommend producing this every month. And you’ll need an annual report as well for your tax returns.
The general formula for the income statement is Total Revenues - Total Expenses = Net Income (or Net Loss). Start at the top of the report, where revenues are reported, and then flow down to take out the expenses and eventually get to the net income or loss. To give a more detailed look at how a company builds an income statement, we can break down the general formula into some steps:
Let’s look at some of these terms that can be included on your income statement:
Interest Expense. Interest expense is the interest that’s payable on any funds a startup has borrowed, including loans, convertible debt, and lines of credit.
The income statement is a great way for founders, investors, analysts, and other stakeholders to get an overview of the financial health of your startup. While many startups don’t earn a profit, the income statement also provides detailed information about the startup’s expenses and revenue trajectory. It can help founders determine if they’re operating efficiently. Tracking expenses closely lets founders and CEOs see more easily where they should allocate resources, or where the company may need to cut costs. Most importantly, the income statement will help startup management decide when they should raise additional funds – every startup industry has particular metrics that VCs look for that indicate that the company is mature (or hot!) enough to raise the next round of capital. This is where those metrics live.
As noted earlier, you’ll need an income statement when you try to raise funding from venture capital firms or if you’re seeking debt funding. While income statements show a business’s current profits and losses, they’re also used to predict your future profitability, showing the potential for earnings and increased share value. Of course, income statements depend on what type of startup you are. A retail startup with high inventory is not going to have the same expenses as a tech startup with minimal inventory and high fixed asset costs. So investors also compare your income statement to similar startups, to help them evaluate your operational efficiency and how well your startup manages expenses.
When analyzing income statements, there are two primary methods: vertical and horizontal analysis.
Yes, the income statement and the profit & loss (P&L) statement are indeed the same. They are simply two different terms for the same financial report. Both provide an overview of the financial performance of a business over a specific period of time, showing the revenues, costs, and expenses incurred during that time. The resulting figure, which can be either a net income or net loss, indicates the profitability (or lack thereof) of the business. They are easy to find in your accounting software - for example, in QuickBooks, click reports to get to them.
The term you use can depend on personal preference, industry standards, or regional norms. If you have a venture investor, they should know both terms and use them interchangeably. In some parts of the world, for example, “income statement” is the more commonly used term, while in others, “P&L” is the standard. Regardless of the term used, the core purpose remains the same: to give a detailed account of a company’s financial status and performance.
It’s worth noting that the term “P&L statement” may be more common among entrepreneurs, particularly in the startup scene, because it emphasizes the concept of profit and loss, which are key indicators of a company’s operational success or failure. However, in financial accounting, among professional accountants, and investment analysts, the term “income statement” is often preferred.
Financial statements aren’t the most exciting things that founders have to work on. But compiling complete and accurate financial statements on a regular basis is crucial to convince investors that you have a solid business concept. It also sends a strong message to investors, creditors, shareholders, and board members that you’re reliable and serious about your business. For more information about financial statements and startup accounting, please contact us.
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