First chapter of interpretation of financial statements is income statement. Income statement first tells you the story of Revenue. It is the cash comes in to the pot through the business activities like sales and services that firm provide. Either you sell a torn trouser or produce a brand new Apple i-phone, both will generate income. Depending on your type of business, the number may spill your flipbook. The total income will come from core and non-core operations of the firm.
Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold. In many countries, revenue is also referred to as turnover. Analyzing revenue of any firm will help investors to understand long-term fundamentals in a better manner.
Until now, we were referring to Gross Revenue which is unrefined. When we put a ‘net’ in the gross revenue and deduct the expenses, we will derive the Net Revenue of the company which is more sensitive for investors and competitors. Net Revenue may go positive or negative depending on the cash flow management.
One saying is: ‘revenue is vanity, cash flow is sanity, but cash is king’. If you don’t fix the King properly, then king will ruin your business.
Having a bulk of revenue doesn’t show that business is running smooth. If so, Airline companies could be one of the most lucrative businesses, but they are not. There is a famous quoting of Warren Buffet that, “for a billionaire to be a millionaire, invest in airlines”. Cash inflow is very much needed for a firm to stay firm. The optimization of inflow and its ultimate usage comes most important for success. Moreover, investors would be very much keen about the audited revenue report of firm. But, to keep in mind, revenue is not the whole thing about a firm.
Here comes the importance of profitability. Profitability is the more key actor which is determined by several fundamentals like profit and loss statement, cash flow statement etc. which rate a company. When a company has net revenue positive, investors will sigh long. Going the other way, even the bankers hesitates providing loans to the firm who is in loss. We will emphasize more on expenses in the upcoming blog.
Why Accounting Firms
Income statement is to be provided to the firm in different times. Most of the firms get the help of accounting firms of respective countries to have their revenue calculated and audited. As corporate legal knowledge of the country is needed to generate the same, Singapore could use Singapore Accounting Services. This outsourcing will lessen firm’s management stress, and help to focus on its business more.