Income Statement Template (Free Excel, Google Sheets & PDF)

What's Included in This Income Statement Template

There are only three tabs, and you only need to complete one of them.

• How to Use: a short guide covering who the income statement template is for, how to choose your reporting period, the four mistakes that cause most common problems, and how to read the percent of revenue column.
• Income Statement: a blank statement template, with formulas to calculate every subtotal and percentage already built in for your convenience.
• Example: a finished statement for XYZ Company, a small business at the end of its first year, so you can compare your file against a completed example.

The statement itself covers what a lender expects to see, and in the proper order:

• Revenue, split into sales, service and other
• Cost of goods sold, covering materials, direct labor and other direct costs
• Gross profit, calculated for you
• Operating expenses, twelve named lines from wages and rent through to depreciation and travel (additional lines can be added if needed)
• Operating income, your profit before interest and taxes
• Interest and taxes, kept separate the way an accountant would expect
• Net income, your bottom line
• A percent-of-revenue column on every line, showing where each dollar went

Cream-colored cells are yours to fill in. Everything else calculates on its own, and you can leave any line blank if it doesn't apply to your business. Edit as you see fit. 

The Formula: Sales, Minus Cost of Goods Sold, Minus Expenses

Every income statement, from a one-person business to a listed company, is measured by one simple formula.

You start with the amount sold, minus what it cost to deliver it, then take away what it cost to keep the business running. What's left at the bottom is your net income, and that number is critical for running a successful business long-term.

Written out, the formula is sales minus cost of goods sold minus expenses equals net income. The income statement template does it in four steps rather than one, because each step answers a question of its own:

• Total revenue minus cost of goods sold gives you gross profit. This is what's left after the cost of delivering the work, before any overhead expense.
• Gross profit minus operating expenses gives you operating income. This is the profit your core business makes, before interest expense from loans and tax get involved.
• Operating income minus interest expense gives you income before taxes.
• Income before taxes minus tax gives you net income. Your bottom line.

Running XYZ's figures through it: $180,000 in revenue, less $58,000 to deliver the work, leaves $122,000 in gross profit. Take off $71,500 of operating expenses and you have $50,500 of operating income. The loan interest takes $1,500, and with no tax at the business level, net income comes to $49,000.

Those four steps are why the income statement is worth more than the single number at the bottom. A business can have healthy gross profit and still lose money if its overhead is too high, and by reviewing each step you'll quickly identify where things went wrong and what to correct if necessary. 

A Filled-In Income Statement Example

The Example tab of the income statement template shows a complete statement for XYZ Company, a small business at the end of its first year.

XYZ brought in $180,000, all of it from sales. Delivering that work cost $58,000, split between $18,000 of materials and $40,000 of direct labor, which leaves $122,000 of gross profit. Operating expenses came to $71,500 across twelve expense categories, from $30,000 of wages down to $800 of travel. After $1,500 of loan interest, the business finished the year with $49,000 of net income.

Read the percent column beside those numbers and the business starts to make sense. The cost of delivering the work took 32 percent of revenue, which leaves a gross margin of 68 percent. Operating expenses took another 40 percent. What survived is a net margin of 27 percent, and that's a healthy first year profit margin for most small businesses.

Prospective lenders are going to zero in on those percentages in a first pass review of your business plan. They'll know what healthy percentages look like for similar businesses in the same industry. 

Revenue: What Came In

Three revenue lines sit at the top of the income statement template. Of course, you can customize the names if you wish, but for now Sales Revenue, Service Revenue, and Other Revenue catches everything you need. 

The first line covers products or goods sold, the second covers work you delivered, and the third catches anything else outside the first two, such as a commission or a one-time license fee. XYZ used only the Sales Revenue line, which is normal for a lot of businesses.

The rule that trips some business owners up on the incomes statement is the timing of revenue. Revenue is recorded when you earn it, not when the money arrives, so if you invoice a client in March and get paid in April, that sale belongs to March on your income statement. The cash shows up in April on your cash flow statement, and the amount owed in between sits on your balance sheet as accounts receivable.

That's the biggest difference between how money is tracked in financial statements versus your bank account, and it's the reason a profitable business can still be short of cash. 

Cost of Goods Sold and Gross Profit

Cost of goods sold is what it costs you to deliver the thing you sold. Nothing else belongs here.

The income statement template gives you three lines. Materials and direct costs cover whatever physically goes into the product or the job, while direct labor is pay for the people doing the work itself. This means you'll include labor costs for the technician on site, but not for the bookkeeper in the office. Other direct costs account for subcontractors and delivery.

XYZ spent $18,000 on materials and $40,000 on direct labor, so $58,000 to deliver $180,000 of work.

Labor expense is something that's easy to get wrong. If someone's time is billed to a customer or spent making the product, they're a direct cost, and if they answer the phone, do the books or run the business, they belong in operating expenses further down the page. Putting the wrong person in the wrong place doesn't change your net income, but it does change your gross margin, and gross margin is one of the first things a lender looks at.

Gross profit is what's left once those costs come out, and the income statement template calculates it for you. XYZ's $122,000 is a 68 percent gross margin. That's the money available to cover everything else, from rent and wages to insurance, the loan, and whatever profit you're hoping to keep.

Operating Expenses, Interest and Taxes

Operating expenses are the costs of being open, whether or not you sold anything this month.

The income statement template lists twelve expense categories, and these are common for most small businesses: wages and salaries for the people who aren't delivering the work, payroll taxes and benefits, rent, utilities, marketing, insurance, office supplies, repairs, professional fees, depreciation, travel, and a catch-all line at the bottom. Leave any of them blank if they don't apply.

XYZ's came to $71,500, with wages at $30,000 the largest single line by some distance, which is typical for most businesses.

Depreciation deserves a call out, because it's the line owners most often skip. It spreads the cost of equipment or a vehicle across the years you use it, and no cash leaves your bank account in the month you record it so thing of it as a cashless expense. It's still a real expense. Leaving it out overstates your profit and puts your income statement out of step with your balance sheet.

Below operating income sit interest and tax. These are kept separate on the income statement for a reason. Interest is the cost of how you financed the business rather than how you ran it, so a lender wants to see operating income before it comes out. Enter only the interest portion of your loan payments here. The principal isn't an expense at all; it reduces what you owe on the balance sheet.

Tax is often zero on a small business statement, since many owners pass profit through to a personal return. XYZ shows nothing here, which is why its income before taxes and its net income are the same $49,000.

What a Lender Reads First

A lender doesn't start at the top of your income statement. They start with these three numbers and then work backwards.

• Net income, and whether it's positive. A loss in year one isn't fatal, and plenty of good businesses post one. What matters is whether you can explain the loss and show when the business will become profitable.
• Gross margin, as a percentage. This tells them whether your pricing works before overhead is even considered. A thin gross margin means there's very little room for anything to go wrong.
• Operating income. Profit from the business itself, before borrowing. If this is healthy and net income isn't, the problem is how the business is financed rather than how it's being run, and that's an important conversation worth having.

After those three items are reviewed, lenders look for consistency with everything else you've handed them. If your business plan says you'll add two clients a month and your revenue line adds five, they'll notice the discrepancy. If your balance sheet shows equipment but your income statement has no depreciation, they'll notice that too.

The statement is also a test of whether you understand your own business. Being able to say why your gross margin is what it is, and which line you'd change first if you needed more profit, goes to your credibility as a knowledgeable business owner.

"The longer you’re not taking action the more money you’re losing."

- Carrie Wilkerson

How the Three Statements Work Together

Your income statement doesn't stand alone. The number at the bottom of it appears on both of the other two statements, and a lender reads all three as one set.

XYZ's $49,000 of net income leaves this page and lands in two places. On the balance sheet it shows up as earnings kept in the business, part of what the owner has built up. On the cash flow statement it's the very first line, the starting point for working out how much cash the year produced.

The three financial statements answer different questions, which is exactly why lenders want to review all of them. This income statement tells you whether the year made money. The balance sheet tells you what you own and owe at a specific point in time. The cash flow statement tells you whether the profit is only on paper or if its actual cash in hand that you can now spend.

A business can look healthy on one and be in trouble on another. XYZ earned $49,000, but $15,000 of that was still sitting in customers' hands as unpaid invoices at year end, which is why the cash in the bank came to $23,000 rather than $49,000. Nothing on the income statement would tell you that.

Understanding each statement on its own is the first step. Understanding how a change in one moves the other two is what lets you look at a set of financials and know whether the business is healthy, and it's the reason all three templates here use the same company and the same numbers.

Common Mistakes on an Income Statement

Most of what goes wrong on a small business income statement comes from a handful of oversights, and each one is easy to correct once you know to look.

• Mixing direct costs with operating expenses. The cost of delivering the work belongs in cost of goods sold, and the cost of running the business belongs below it. Putting them in the wrong place leaves your net income unchanged but ruins your gross margin, which is one of the numbers a lender checks first.
• Recording the owner's draw as an expense. Money you take home isn't a cost of running the business, so it never appears here. It reduces your equity on the balance sheet instead.
• Skipping depreciation. It's the only expense that never leaves your bank account, which is exactly why people forget it. Leaving it out overstates your profit and puts this statement out of step with your balance sheet.
• Entering the whole loan payment as interest. Only the interest portion is an expense. The principal reduces what you owe, and it belongs on the balance sheet.
• Recording revenue when the money arrives. A sale belongs to the month you earned it. If you record the sale only once the cash is received, your income statement quietly turns into a cash flow statement, and the financials will not match up properly.
• Forgetting the cost of employing people. Wages are only part of it. Payroll taxes, workers' compensation and benefits can add sixteen percent or more on top, and leaving them out understates your costs across the whole statement.
• Mixing periods. Twelve months of revenue against nine months of expenses will still produce a number, and it will be wrong. Pick a period, use the same one on every line, and label it at the top.
• Numbers that contradict your other statements. If this statement shows depreciation and your balance sheet shows none accumulated, or your net income doesn't match what appears in equity, a lender will see the error.

The Rest of the Business Planning Toolkit

The income statement is one of seven free tools built to work together on a complete business plan.

• Business Plan Template and Guide: The written plan these numbers belong in, with a step-by-step guide to every section.
• Business Plan Financial Workbook: Projects your first year from three input tabs and builds all three statements for you.
• Balance Sheet Template: What the business owns and owes on a single date, with the ratios a lender calculates built in.
• Cash Flow Statement Template: Where the year's profit went, and whether it turned into money you can spend.
• Mission Statement Template: The short statement of purpose that opens your business plan.
• Business Plan Appendix: Where your supporting documents go, including full financial statements a lender may ask to see.

All three statement templates use the same business, XYZ Company, and the same figures, so you can follow one number across all three and see how they fit together.

Download Income Statement Template

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