What is the importance of income statement in decision making process of a business?
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Importance of income statement in decision making process of a business
- Category :Accounting
There are a lot of benefits of preparing the income statement in a business entity. It gives a clear picture of a business pertaining to its profits and losses. Though it provides the transactional details for a period of time, unlike the balance sheet that’s a snapshot of a business at the specific point in time, the income statement provides useful insights to assist in decision making process. Let’s discuss briefly as to how it helps in the process of decision making of a business.
A monthly or at least quarterly evaluation of business with the help of income statement is of great importance in making effective decision making process for a business organization. Income statement provides valuable information in terms of revenues being generated and the expenses being incurred during a particular period
The Income Statement offers effective tools to management for making decisions as to how revenues may be generated more and expenses may be reduced or controlled.
Income statement is of great value and relevance to a business. Effective decision making process entails drawing financial information from income statement. In this way, both portions, revenues and expenses, provide useful information to managers. It is by means of the financial information drawn from income statement that it can be identified how a business has performed during a particular period. It also enables a manager to compare the current month performance with that of previous month’s allowing him to make decisions in accordance with the requirements.
In addition, income statement enables to undertake planning creating a sense as to how decisions can have direct impact on the revenue generation ability of a business or cause a business to increase more expenses.
Considering various line items pertaining to both revenue and expense portions of an income statement, a manager is able to understand overall performance of a business entity clearly. One the one hand, reviewing the performance in terms of sales or services, he can gain insights to take necessary steps towards increasing revenues in terms of sales or services, on the other hand, he can adopt the ways to decrease particular expenses or to control them in the least.
Income statement is also used to compare trends in which a business has either grown to make more money or has made more losses. Not only it provides the information in relation to current performance of a business entity, but it also gives useful information about the past performance during the year while enabling managers to evaluate how both revenues and expenses have been affected in every month. It thus an income statement serves lots of purposes offering to provide effective tools for decision making process.
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