How to prepare Income Statement

The Income Statement is the first of the three components of a Financial Statement. The Income Statement is a representation of how much money a company earned (lost) during a specific period of time, typically 1 month, 3 months, 1 year. For a coffee company, the thing that jumps out immediately are Cost of Goods Sold (COGS), Labour Costs, General and Administration, Interest and Banking Charges.
The first line of an Income Statement lists the Revenue (Sales) of our Company. This is a compilation of all daily sales receipts, coffee, espresso, muffins, coffee makers etc. during the period. Note: Never hide revenue or misrepresent your company's sales. This is not only illegal and dishonest, but is a clear indication that you are not operating a professional organization capable of long term success.
This revenue only includes sales which are in the normal course of business and do not include one time sales, disposal of used equipment etc. For instance, if you have a 5 year old Linea that you are selling to your brother in law, this is not recorded under Revenue. High Revenue, as we shall discover, does not necessarily equate to high profits.

The second line of the Income Statement is Cost of Goods Sold (COGS). This represents all of the money the company spent on items it sells, including coffee beans, coffee makers, travel mugs, tea, milk, sugar, cups and lids, stir sticks, baked goods and other food. Note: It is helpful to have a cash register system which can separate revenue steams so that you can identify how much revenue is being generated by each Cost Centre. For example, if you are spending $1000 per month on baked goods, but only generating $1200 in revenue, you either have your pricing wrong, theft, or waste. Either way, you can't tell if your revenue is bundled together.

The third line in the Income Statement is Gross Profit. Gross Profit is determined by subtracting COGS from Revenue. This number in itself does not tell us whether the company is successful but can tell us whether it's pricing is appropriate by calculating Gross Profit Margin. We do this by dividing Gross Profit by Revenue (Sales). A high percentage of Gross Profit Margin is a positive sign, but doesn't necessarily translate into Net Profit. For example, 70% Gross Profit Margin is an excellent result for any coffee company.

Labour is either treated as a part of Selling, General & Administration, or preferably, treated on it's own. Labour is an important controllable cost and it includes labour and salary taxes, benefits and medical expenses if applicable. An exemplary target for labour cost is 20-25% of Revenue.

Selling, General and Administration includes office expenses, advertising, phone, internet, security, travel, repair and maintenance, legal and professional and the big one...rent. These are costs which can also be easily controlled by an attentive operator without impacting the quality of the end products. Carefully selecting service providers, paper products, cleaning products, maintenance companies and parts suppliers can greatly effect positive results in the Income Statement. Note: Advertising, when used effectively can be an excellent strategy for improving revenue, but is also a huge burden on General and Administration and is an area where new operators make mistakes by misdirecting scarce funds better employed elsewhere. Rent can either be a valuable asset or huge liability. An excellent target for rent as a portion of Revenue is 10-12%.

Depreciation is a simple representation of how much utility has been used up in any piece of equipment. For example, if you expect your new espresso machine to last 5 years, you are expected to depreciate the value of the equipment by 20% per year. This amount reduces the equipment value in the Balance Sheet by an equal amount, while increasing the accumulated depreciating account in the Balance Sheet by the same amount. This is a real cost and is completely controllable by regularly maintaining your equipment thereby extending it's lifespan beyond the depreciation period. Those companies that regularly purchase and upgrade their machinery to the latest (most expensive) models necessarily incur high depreciation costs which negatively impact their Income Statements and Balance Sheets.

Interest and Bank Charges is another red flag area for coffee companies. The cost of a new build is significant and requires funds in the area of 200-400k. At todays low interest rates, the burden of carrying 200k of debt is manageable, but if rates rise to levels experienced in the 1980's (15-25%) most businesses would fold under the pressure. A new entry to the coffee business would be well advised to conserve their funds and avoid debt at all cost. An excellent strategy is to benefit from others errors by purchasing failed coffee businesses for pennies on the dollar and employing the saved funds to improve and promote the business.

Sale of Assets is where we record the funds a company receives when it sells used equipment, property, fixtures, etc. This is where a company that regularly upgrades their espresso machinery would account for the sale of the old machine. Note: If a company purchases an espresso machine for $10k, depreciates it by $2k in the first year, and sells the machine at the end of the first year for 6k, it needs to record a loss of 2k on the sale of assets. That transaction cost the company 2k in depreciation plus 2k on the sale of the asset equalling $4000 per year.

Net earnings is the amount of money the company has left over after paying it's taxes. Typically, we must allow for approximately 35% for taxes. Note: if your company is incorporated, pay yourself an extra amount at year end to avoid double taxation. Double taxation occurs when a company pays tax on corporate earnings, then pays the owner a dividend which tax must be paid on also. By anticipating profit, the owner can pay tax only on the salary earned and at the same time reduce the corporate tax payable. An excellent target for a coffee company is 15% on total Revenue.