Service-based companies use income statements to determine profitability like any other business. Differences most certainly exist on a service business income statement due to the nature of the company’s activities, which are different than a retail or manufacturing business. The best tips for creating a service business income statement include focusing on the sales revenues and discounts offered to clients, detailed line items for expenses, and possibly creating individual income statements for each major job or client. Using the same method to create income statements on a monthly basis is important to discover financial trends. Having the income statements reviewed by a licensed accountant is also a good idea.
Service businesses may not have extensive amounts of cost of goods sold for each job, task, or activity in which they engage. These companies may, however, offer frequent discounts in order to induce sales from current and future clients. For example, offering three services for the price of two or a discount on multiple services purchased at one time is often possible with these companies. Therefore, the service business income statement should reflect the purchase discounts offered to clients in order to induce sales. These items usually go directly below the sales revenue lines on the income statement, reducing the total sales revenue for the period.
Expenses are also an important part of the service business income statement for each period. They represent the immediate use of capital to generate revenues, with the item purchased not lasting very long in most cases. The income statement should reflect each expense on a separate line as service businesses can have many different types of expenses necessary to operate. Having as many expenses listed out on individual lines for a service business income statement allows for trend analysis to determine if they are increasing to unacceptable levels. Additionally, knowing which expenses the company can reduce helps the business remain viable over a long time period.
Service businesses may have special jobs for individual clients or desire information based on each project. Therefore, the creation of an individual service business income statement for each client or project may be worthwhile. All the information on these income statements is exactly like the information on the single, aggregate income statement. The significant difference is that each statement only contains information on the client’s job or individual project. This allows for a singular review on service activities, though an aggregate income statement is necessary for true accounting purposes.
