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Analysis of Income Statement

Simple Alliance, Kenya Limited


Income, Price, Profit Dynamics

Your business income is distinct from the associated profit figure. You need to understand this difference so as to make appropriate business decisions. By generating an income statement, you differentiate these terms. Further, you need to be aware of how the income and profit items are related to the prices you sell your merchandise at.

In this section, we will examine the nature of profit, income, and pricing. We will also look at the relationships among the three elements.

Income

Your revenues are represented by the monies you garner from the sale of your services and goods. This is the entire sum received before you deduct any costs that went into the production, distribution, and sale of the relevant wares. 

Profit

Your profit comprises the cash amount that remains after you subtract expense items from the income figure. Income is of two types, namely:

  • Gross profit
  • Net profit

 Gross Profit

You arrive at the gross profit figure after deducting the Cost of Goods Sold (CoGs) figure from your income sum.

Gross profit = Income less CoGS

                  = Income - CoGS 

Net Profit

To get the net profit figure, deduct all overheads from the gross profit figure.

Net Profit = Gross Profit less Overheads

                = Gross Profit – Overheads

Pricing 

When determining the monies that consumers will pay for your wares, you are doing pricing. Your pricing needs to be governed by sound business principles. You need to periodically re-examine your prices and look at them against the costs that go into producing your commodities. As you review your prices, you may discover that a certain service or product barely earns you profits. In such a case, you have two options to take, namely:

  • Discontinuing the production of the service or product
  • Pushing its selling price up

Important Caveat

Even if you can, do not tend to price your merchandise too low. Although the strategy is aimed at garnering you more customers hence making increased sales, is has its downsides. Customers may suspect that your product is of low quality. In such case, your low-price strategy becomes counterproductive. Always price your wares commensurate to their quality. 

Price Dynamics

Your quoted price is affected by a number of intrinsic as well as market elements.

Intrinsic Price Determinants

These include:

  • Costs
  • Value
Value

A major intrinsic factor affecting prices is the value of what is on offer. Generally, high-quality products attract high prices. Low quality wares fetch poor prices.

Cost

The more expensive it is to produce your wares, the more expensively you are likely to price them. You need to follow this principle so as to recoup your production costs while also making some profit.   

External Price Determinants    

Certain market forces also affect the price of your products. Key ones include:

  • Competition
  • Demand

Income, Pricing, and Profit Relationship

The price you set for your products determines the amount of income you get. Usually, while determining the selling price, you consider a number of factors, a major one being the entire costs that went into the production of your product. By considering the production costs, you delve into gross and net profit figures.  

As a small business owner, you need to avoid the pitfall of failing to distinguish your profits from income. You can get hold of accurate figures by preparing an income statement which computes gross profit from cost of goods sold and income figures. To arrive at your net profit value, the income statement then deducts operating expenses from gross profit. This profit-cost analysis enables you to be well versed with business performance. Periodically, you need to review your quoted prices so as to determine if specific items are generating profit or not. You can then take appropriate action in regard to these items. These measures will aptly inform you of whether any cash you have represents profit figures or if it is merely business cash.

Copyright (C) 2016, Simple Alliance Kenya Limited

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