Income statement for Professional Service Company

An income statement is a report of company revenues and expenses showing profit in the bottom line in a certain period of time, usually one year or month. Another name for an Income Statement is a Profit and Loss Account.

In this article, we will show you the different types of income statements.. This way, you can choose one of them to help you manage your business functions and profits more efficiently.

After reading this article you will be able to create the perfect income statement for your business’s needs.

Income statement for service company

This example of the Profit and Loss account is based on the functions of the service company.

As such, it contains few profit levels. Profit levels shown in this income statement are gross margin, commercial margin, EBITDA, and net profit.

You can download an Excel file with a comprehensive income statement. The file includes:

• Income statement with basic calculations
• All important components of the income statement
• Historical presentation through our 5 years (separate columns)
• Contribution to growth analysis
• Vertical analysis – ratio numbers
• KPIs calculation based on the Income statement

Components of income statements

An income statement can contain as many components as the management deems necessary.

Too many components can lead to ‘’analysis paralysis syndrome’’. On the other hand, too few components don’t give a clear insight into the functioning of the business.

We shall provide an explanation of the basic component below.

Revenues

Sale Revenues

These are the classic incomes you make by selling your services.

In some cases, the income statement only contains this item. On the other hand, if your business has multiple service lines, you can display sale revenues per service line within the income statement.

Increasing the Value of Unfinished Services

Companies usually don’t calculate these revenues, which can affect the income statement’s correctness.

Namely, the usual practice entails that services are only recognized as income from the moment they have been invoiced.

However, what happens when your project starts in September, but its completion and invoicing are scheduled for March of the next year?

You shouldn’t recognize all revenues within the following year (invoicing period). Instead, a part of the revenue should be recognized in the year in which expenditures were made for a specific project.

This is backed by the principle of causality in accounting.

The revenues in the current year should be recognized in the amount of the change in the cost price of the unfinished services.

Expenses

Cost of services (products) sold

These are the most direct costs needed for the production of a service, project, or product. Such costs are:

• Salaries
• Other expenditures to employees
• Bonuses
• Payment to subcontractors directly involved in the production of services
• Direct material costs
• Cost of goods sold (COGS – relevant for trading business only)

Direct costs

• Rentals
• Software use
• Staff education (this can be presented in the general cost as well)

Sales costs

Sales costs reflect the effort for selling your services.  Such costs are:

• Marketing costs
• Networking costs
• Referral fees
• Sales costs
• Car costs for sales staff
• Other costs related to sales staff

General and Administration costs

• Insurance and Health
• Internet
• Courier, post office, phones
• Car costs (for general and admin staff)
• Office costs
• Donation and social responsibility costs

Depreciation

Depreciation represents the value consumption of fixed assets.

It is the amount of money calculated during the lifetime of the fixed assets. This money is allocated for compensation and reproduction (renewal) of the fixed assets. The amount is a part of the selling price of finished products or services.

The basis for this calculation is the purchase value of the fixed asset.

For example, the cost of a piece of equipment is $5000, and its estimated useful life is 10 years.

The depreciation rate is 10% per year. So, the annual depreciation expense is $500.

Impairments

This cost is related to asset impairment.

For example, the probability of collection receivable from customers can be low. In that case, you should impair your receivables and recognize impairment cost in the profit and loss account.

Operating profit (EBIT)

The operating profit represents the difference between all operating incomes and operating expenses. It is the company’s income before interest and taxation.

EBITDA

In contrast to EBIT, EBIDTA doesn’t include amortization. So, this category represents the company’s earnings before the depreciation, taxation, amortization, and interest.

Tax

The corporate tax represents the taxes expense. This expenditure depends on the corporate income tax rate applicable in the specific country. For example, this rate is 33% in some US states while it’s 19% in the UK.

Net profit

Net profit is the difference between total revenues and total expenses that have been reported in accordance with the generally accepted accounting principles for a certain period,

How to prepare an income statement?

Technically, anyone can make an income statement if they have a basic understanding of calculations via tables (in Excel, for example).

The income statement preparation is based on accounting data.

If your accountant provides you with a trial balance or an accounting general ledger you can create an income statement fairly easily.

However, ensuring that the figures that form the basis for the preparation of the income statement are aligned with the generally accepted accounting standards (GAAP) is a challenge.

You will need some accounting knowledge for that.

Cost and profit centers

It is very important that the accounting system offers the option for each general ledger account to have its own cost, profit, or organization center.

In that case, if the center is set up to include one item in the income statement, the statement can be directly exported from the accounting software.

Statutory vs Management Income Statements

An income statement is a document that is usually submitted to the state authorities in all countries.

In some countries, there is a strictly prescribed form for the income statement that cannot be changed. The income statement submitted to the authorities is also called a statutory income statement.

However, for the company, the income statements compiled for the management’s needs are much more important.

They are usually different in form from the statutory income statements.

Yet, precisely the form reflects the performance of different business functions.

Actually, the form is adapted to the specific business. This is done to incorporate the key income and expenditure drivers for the said business. this type of income statement is also called a functional income statement.

Income statement analysis

Income Statement Vertical Analysis (variance analysis)

The income statement is a report for a certain period. Hence, the vertical analysis is a comparison of achievements in different periods.

For example, there is a separate column in the income statement, that shows the percentage of increase or decrease for each item compared to the previous year.

For example, the cost of salaries can be increased by 14%. In addition to the change in percentages, it is important to incorporate changes in the absolute amount. To put it simply, the percentage change can be severe, but the real absolute change can be small.

Income Statement Horizontal Analysis

Ha horizontal analysis represents a calculation and comparison of different items.

The ratio obtained this way has a certain meaning in these cases.

For example, the net profit is $1.000, and the sales revenue is $100.000. if we divide these numbers, we’ll get to the conclusion that the net profit is 1% of the total sales. That is to say, this is an indicator of profitability.

To illustrate, in this case for each dollar of sales the company gets 1% of the profit.

Some other examples of ratios in the horizontal analysis are:

• Share of wages in income
• Share of EBITDA in income
• Share of rentals in income

Analysis Concerning the Budget

As a rule, the budget is calculated in the same form as your income statement.

If you have a monthly budget for every item in the income statement, you can see how far behind the budget you are at any time and take appropriate action.

Contribution to Growth Analysis

This analysis is characteristic for performance monitoring at the level of a specific service line or product group.

Specifics of the income statements for different businesses

Here we list some specifics in the appearance of the income statement example, depending on the type of business

Law firm income statement

With law firms, it is important to monitor income in all branches of law.

Thus, the income statement should include income from, for example:

• Litigation
• Real Estate
• Banking and Finance
• Labor law
• Commercial Law

When it comes to expenses, it is most important to track the salaries.

The difference between revenues and salaries represents the law firm’s gross margin. Other expenses that should be included in the income statement are rent, internet and utility bills, etc.

If you have a functional income statement, you can track law firm metrics very efficiently.

Accounting firm income statement

In an accounting business, it is important to monitor revenues by service lines such as:

• Bookkeeping
• Payroll
• Tax advisory and compliance
• Financial reporting

The key expenses in the income statement are salary expenses, bonuses, software expenses, and rent. Marketing and sales costs are no less important.

Segmented income statement

A segmented income statement is an income statement broken down into segments, for example into service lines.

It makes it possible to see how much organic profit was made not only at the company level but at the specific segment level.

The segments can be business units, service lines, or projects.

Lastly, the income statement can be tracked by the employee. It provides information on how much income and expenses come from a specific employee. Hence, it can help you assess employee performances.

To be able to make a segmented income statement, you need to allocate some general expenses and incomes to specific projects and employees. Time tracking tools are very efficient in tracking time per individual service line, and provide good directions for the allocation, i.e. creating a segmented income statement.

Income statement FAQ

Is the income statement the same as the profit and loss account?

In a nutshell – yes. It is the same financial report, but the terminology is different.

The term Income statement is more prevalent in the US, while the term Profit and Loss Account is used in Europe for the most part.

When Is the Income Statement Drawn Up?

The statement is usually compiled once a year when it comes to statutory reporting.

For management purposes, the income statement gets prepared either every month or every quarter. The periods depend on the size and complexity of the indicators.

Can You Calculate KPIs From an Income Statement?

This depends on the type of KPI you want to calculate.

The income statement gives you the data to calculate KPIs related to profitability and structure.

Here are some KPIs you can determine through an:

• EBITDA Margin
• Net profit margin
• Gross profit margin
• Wage costs share in total revenues
• Revenues per FTE

What are the mandatory items in Income statements?

The income statement should contain revenue, expenses, and profit, at least.

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