# Income statement template for agencies and consulting firms An income statement can help agencies and professional service organizations track their revenue, expenses, and profitability over time. Generate yours in minutes with this free template. ## How to use the income statement template ### Tally your revenue Start by entering your business’ total revenue within your desired time frame. ### Subtract your costs Gather your COGS (Cost of Goods Sold), such as subcontractor costs, software, and travel. ### Know your net income Finish populating the sheet and watch as your income statement appears. ## Breaking down your income statement Identify opportunities to improve Sometimes called a profit and loss statement (P&L), an income statement can give you a pulse on your business’ financial health and allow you to track revenue, manage expenses, and evaluate your growth over time. Stay on top of your income statements over the long term Compare income statements over time to see if your business is on a path to profitability. An increase in revenue might demonstrate traction in a certain area while monitoring COGS can ensure you stay lean as you scale. ## Understanding income statements ### What is an income statement? An income statement or profit and loss (P&L) statement is a financial document that shows how much a business has spent and earned over a specific period of time — usually a fiscal quarter or year. The statement is used to understand a company’s profitability and identify areas where cost savings can be made. ### What is included on an income statement for an agency or consulting business? While every P&L differs based on the type of business, there are a few major categories you’re likely to find on most profit and loss statements: - Revenue: A P&L statement begins with revenue, or the money a business has earned from sales or other activities during the measured time period. - Cost of goods sold (COGS): COGS is what it costs your company to deliver its core service or product, including direct expenses like salaries for your team, subcontractors, travel costs, and software and other tools. It doesn’t include operating expenses like rent and utilities or advertising. - Gross profit: COGS is subtracted from revenue to determine gross profit, or a business’ profit before accounting for operating expenses. - Operating expenses: These are expenses not related to delivering your core product or service. - EBITDA: EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” It’s a good measure of a business’s ability to generate cash flow before taking into account certain non-operating expenses. - Interest expense: Interest expense refers to interest owed by a company borrowing money. - Tax expense: This is the amount the business paid on its income tax for a given year. - Net income: Once you deduct all expenses from your gross profit, you’re left with your net income. - Loss: If expenses are higher than the business’s revenue, the business will generate a loss instead of a profit. ### How do you analyze an income statement for an agency or consulting business? Business owners should use a profit and loss statement to understand if their business is profitable or on the path to profitability. Comparing P&L statements quarter-over-quarter and seeing an increase in revenue may indicate an increase in demand for the product or service. ### What is horizontal analysis vs. vertical analysis? Horizontal analysis looks at changes over time within a specific line item on the P&L statement, while vertical analysis considers the size of expense items eating into a company’s revenue over time. ### What are common mistakes when creating income statements for an agency or consulting business? - Mixing revenue streams: Failing to differentiate between different sources of revenue. - Misclassifying or leaving out costs: Not attributing contractor or freelancer fees to COGS. - Incorrectly categorizing labor: Treating all labor costs as OPEX. - Tax errors: Misclassifying independent contractors vs. employees for tax purposes. ### How often should you analyze your income statements? Most businesses generate a P&L statement monthly, quarterly, and during tax season to give them a snapshot of the company’s financial performance. ### What is a pro forma income statement? A pro forma income statement forecasts your company’s future revenue, expenses, and profits over a specific period, based on historical data, growth goals, and market conditions. ### How are expenses forecasted on a pro forma income statement? Expenses are forecasted by reviewing historical costs, analyzing trends, and adjusting for future changes you expect in your operations or market. Here are a few examples of costs you might project: - Fixed costs like rent and insurance based on existing contracts. - Variable costs such as marketing or payroll that increase in proportion to revenue. - One-time costs like equipment or product launches.