The Income Statement – Vital for Businesses and Financial Professionals

April 21, 2020

Let’s say for a moment that you are solely responsible for investing $10,000,000 into a company – either public or private. With a big decision like that – what would you want to see from your target company? Would you want to see an income statement? A balance sheet? A governance structure with appropriate risk management? Whenever I ask a financial professional (private equity professional, investment banker, asset manager) who invests like this for a living, the answer is a resounding ‘yes’ to all the questions above.

But, when asked if they have these same structures in place for their personal wealth management, the answer is a bit less emphatic and most often, the answer is ‘no.’ When working with financial professionals as their Personal CFO these financial statements are often the first items that we create. We will be tackling some of the major topic areas for each of these statements over the course of the next few blogs.

Income Statement

Let’s start with the income statement, which helps to understand the basic functions of any business.

  • Revenue just like an investor would like to know how much money a business is making; it is equally important for individuals to understand how they make money. When creating a personal income statement, the revenue line item should be focused on the cash considerations made in both salary and bonus. Many financial firms are altering their comp plans to include more deferred compensation in their bonus plans that extend pay over longer vesting schedules (3-5 years). This can alter when compensation is actually paid out. Therefore, when putting together your income statement, spend time understanding how and when cash payments will be accessible to you.
  • Expenses when you work hard for your money – you want to know it is being spent wisely, whether that be in a business or in your personal life. Understanding your expenses is a vital step. The first step is to understand your fixed expenses such as a mortgage, property tax, childcare, or health care. There are many other categories that can fit into this but are essential and fixed on a monthly or quarterly basis. The other half of the expenses are your variable expenses. These are your lifestyle expenses such as food, clothes, travel, and entertainment. A great proxy for this can be how you utilize your credit card to support your lifestyle. Tools like mint.com are great for organizing and getting an idea of these expenses.
  • Net Incomethe balance of revenues minus expenses, leaves you with your savings. Savings are a critical component of any good financial plan and are vital to understand on an ongoing basis to account for your future goals. When you examine your savings on a regular basis it is important to go back and compare them not only to what you expected, but also what your goals are. This allows you to be disciplined in your savings and set yourself up for financial success. Having both the pro-forma and realized income statements to compare will continually refine and allow better insights into the future.

Any good business owner or investor would demand an income statement before making an investment. They understand that the income statement provides the direction that the firm is headed and can tell you a lot about the foundation of the business and the values that are most important. When working with financial professionals, this is a key first step to creating a successful future and putting a successful plan in place to achieving future goals. If professional investors require them to make an investment – why wouldn’t you create one to invest in yourself?

Matt Kocanda is a Wealth Manager at BDF and a member of the Investment Committee. The investment committee develops BDF’s overall investment strategy. Matt focuses on advising Financial Service Professionals through their complex needs – including cash flow, tax, or estate planning. Matt received an undergraduate degree in Finance from Indiana University.