Using Income Statements to make Decisions

Is the profit higher or lower than last year?

• If higher, what has the business done that could have led to this?

  • E.g. Finding a cheaper supplier of raw materials or increasing sales due to a new promotional campaign

• If lower, why is profit falling? 

  • Have costs increased, such as higher energy bills for the premises, or have sales fallen due to a new competitor entering the market?

Is this a short-term or long-term problem?

• Lower profits may be a result of an external shock affecting all businesses, such as the 2020 Covid pandemic, in which many businesses had to close or reduce working hours

• Some losses may be more long-term

  • E.g. E-commerce growth has led to many high-street stores closing down as the number of customers has dwindled

Is the profit higher or lower than that of competitors?

• If lower, what can be done to become as profitable as other businesses?

• E.g. Does the business need to improve the quality of the products or increase the product portfolio?

Are competitors making losses?

• If they are, the business needs to consider whether the industry is changing to the point that it may become extinct

• Alternatively, it needs to ask tough questions about what can be done to evolve with changing market conditions