How to read an income statement in five minutes

The income statement answers one question: did your business make or lose money during the period? You only need to understand five lines.

The five lines

1. 1Revenue: the value of what you sold during the period.
2. 2Cost of sales: the direct cost of what you sold, such as goods and materials.
3. 3Gross profit: revenue minus cost of sales. It shows whether your pricing covers your direct costs.
4. 4Operating expenses: salaries, rent, marketing and so on.
5. 5Net profit: what remains after all expenses and zakat or tax.

A quick example

Revenue of SAR 1,000,000 and cost of sales of SAR 600,000 give a gross profit of SAR 400,000 — a 40% margin. If operating expenses are SAR 250,000, operating profit is SAR 150,000 — a 15% margin.

Three questions to always ask

• Is the gross margin stable, or falling compared with the previous period?
• Which expense line grew faster than revenue?
• Is profit actually turning into cash? Review the cash flow statement alongside it.