How to interpret a Small Business Income Statement (DRE)

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What is the DRE (Statement of Income for the Year)

The statement of income for the year (DRE) is a report that shows a financial summary of the operating and non-operating activities of a company in a certain period of time.

This result is determined on an accrual basis, which shows the total amount of income or expense on the date they were incurred, regardless of whether they were paid in installments or not.

If you want to go deeper into the topic, check out our post on difference from the cash regime to the accrual basis. While you are not going there, let's look at a very simple example of two revenue launches worth R \$ 5.000, one being paid in cash and another in credit.

In practice, in spite of having sold R \$ 10.000 in January, the company in our example only received R \$ 5.000, while the other R \$ 5.000 (paid in credit card) will only be received within 30 days (next month) and this is how we differentiate from the competence and cash regimes.

• Accrual method - transactions appear in the month in which they were made, regardless of whether they were paid, received or not.

• Cash Regime - transactions appear only when money actually entered the company's cashier, so only paid items appear here.

The ideal is always to have a good view on both types of analysis, since this way you will know exactly how much you are selling and how much you are earning, avoiding failures in controlling working capital and your financial planning strategy.

In this post I will focus on the best ways to interpret a DRE and for this it is important to know how a practical model of structuring it.

DRE model

Although there are several models available to use, what we like most (and we use in our spreadsheet cash flow) is this one:

• Gross Operating Revenue (sale of products, services or goods)
• (-) Deductions from Revenue (returns, rebates and sales taxes)
• = Net Operating Revenue
• (-) Direct Expenses (Sales Costs)
• = General Contribution Margin (Gross Operating Result)
• (-) Indirect Expenses (Fixed or Operating Costs)
• (- or +) Financial or Non-Operating Result
• = Earnings Before Interest and Income Tax
• (-) Provision for Income Tax and Social Contribution on Profit
• = Net Result for the Year

Although it seems complicated to see all these names, the truth is that the logic is very simple and follows a financial inflow of income and expenses deductions. In practice, these items can be organized in this way in the annual DRE:

If your concern is how to set it up, you can leave it in our spreadsheet it is generated automatically after filling in the receipts and expenses, but having just the DRE ready is not enough, you need to understand how to interpret it .

4 Ways to Interpret the DRE

Like any statement, the DRE will be very useful to help you analyze the financial performance of your company and have some insights that looking only at your releases would be difficult to do. Let's see how each analysis can help you through the use of spreadsheet cash flow:

• 1 - Revenue change

Because it is a statement made by the competency regime, positive or negative changes in revenues may not directly impact your billings in the current month, but they will certainly have a future impact.

Therefore, when you have positive changes in revenues, pay attention to your installment policies, delinquency rates and large contracts that may have a risk of non-payment. In the case of negative revenue variations, think about how to reduce costs in an emergency so that you do not have very large short-term losses and a future cash requirement that could impact your results.

• 2 - Direct Expenses and Contribution Margin

This is one of the most basic and simple analyzes that the DRE can offer you. Here you can have a first warning signal. In a nutshell, the overall contribution margin is your operating income subtracted from direct expenses, that is, if it is negative, it is a strong indicator that you have a very costly operation and that you need to review your direct costs.

In our example, each month has a positive contribution margin, which indicates a good operation, but a deeper analysis could look at the variation of this result to see better margins and to understand which costs were more than one month old:

• 3 - Profit or Loss and Profitability

Following the logical order of the DRE, we would now be in the range of fixed expenses, but I like to make a reversal and jump to the analysis of profit or loss, because if we had a positive contribution margin, this is the moment to understand if our fixed costs, financial result or tax payments are high. See this result in our spreadsheet cash flow:

Clearly we had months with high costs that resulted in injury (Feb, Mar, Apr, Jul, Aug, Oct, Nov and Dec) and this is a red alert for implementing cost-cutting changes and policies. In addition, it is worth to understand if the problems are only in costs or if there was a drop in revenue with loss of important contracts, default or even a general decrease in sales.

From this analysis it is worth looking for more specific information that can clarify the bad or good results in the DRE.

• 4 - Comparison with other reports and indicators

As I said above, just looking at the DRE can be a mistake and lead to bad decisions, so whenever you do an analysis on your DRE it is advisable to look at your Cash flow, the need for working capital, accounts payable and receivable.

How to interpret a statement of income for the year

Now that I've talked more generally about how to interpret a statement of income for the year, I'll dig deeper into an example of the revenue analysis of a DRE. It is worth saying here that I always start my analyzes backwards, searching for more relevant information and seeking indications of what generated that result in the data sources used. So, I'll follow this step by step example:

1. Simplified analysis of revenue graphs
2. Summary DRE Research
3. More research, now in the detailed DRE
4. Complementing the analysis in the Launches

Let's see what this would be like in our spreadsheet cash flow:

1. Simplified chart analysis

To start with, one of the simplest and most visual ways to understand your financial is by looking at your cash flow and DRE. In our hypothetical case, I picked up the month of March to look at these 2 graphs:

One shows me that 60% of my revenues are from services and the other shows me that within 89% service revenues comes from marketing consultancies. So in a quick way I already know that my marketing consultancies are quite relevant (at least for this month) and that I did not do any strategic consulting.

Knowing this, I can begin to dig deeper into the summary DRE interpretation.

2. Summary DRE Research

Note that in the Summarized DRE we have the result of every month for the major groups of accounts in our chart of accounts. As I just want to analyze the revenue part, I will focus on the first few lines and as my analysis is from the month of March I will look only at this column:

See that R \$ 9.000 refers to revenues from services and R \$ 6.000 from revenues from products. The differentiation in this case is not so relevant, but if we look at the month of January we would have 75% of the revenues with products, which is relevant. So it's worth investigating further:

3. More research, now in the detailed DRE

Knowing the differentiation of revenues, we can see which sub groups are more relevant and, in our case, the marketing consultants were the ones that generated the most revenue.

Now to see if this value refers to a single sale or more, it's worth seeing the breakdown on the spreadsheet cash flow.

4. Complementing the analysis in the Launches

Here you have exactly a record of all the entries and exits that your company performed in a given month, so just use the filter (you need to unlock the worksheet by clicking on the unlock button in the review menu) to search only the recipes and see this detailed information , as shown below:

Finally, we can see that all the money seen in the DRE is actually scheduled for March (we do not have installments or credit operations launched), but 4 payments, 2 are still unpaid. In that case, it would be worth to understand the reason for the default and to carry out collection actions so as not to lack funds at the end of the month.

Is it worth looking at the DRE alone?

Did you see how doing the analysis of your DRE in practice is a lot easier than you thought? Now, just to remember, never forget to look at your DRE (accrual basis) along with Cash Flow (Cash Regime). This way your analysis becomes much more complete.

If you are looking for a tool for this, I recommend that you use our new spreadsheet cash flow, which is quite complete and allows you both types of analysis and much more (all the images of the post were taken from the spreadsheet).

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Administrator and turismologist, passionate about the possibilities that Excel gives to managers, entrepreneurs and students. He is the managing partner of the spreadsheet department at LUZ - Spreadsheets (luz.vc) and is responsible for the development of spreadsheets with business and personal focus commercialized in its website. He also teaches online Excel courses (cursos.luz.vc) and likes to help thousands of planners through the LUZ Forum and Blog.