It is also possible to express the income statement in percentages only and this is known as a common-size financial statement. You will find that this is frequently used to compare organizations of differing sizes.
For example, as a manager at Gary's Garden Furniture (GGF) you may want to compare its operation with that of the market leader Garden Warehouse (GW).
You can do this despite the difference in size of the two companies by looking at common-size statements of income. In such circumstances comparing actual dollar figures would be meaningless.
From the table you can establish some key factors that come to light when using this style of income statement. These are:
As a manager at Gary's you would bring this information to discussions on the best growth strategy your organization should adopt. Areas to be discussed could include the following:
Avoiding competing directly on price with GW by:
• Not stocking the same ranges of furniture.
• Offering free additional covers or cushions.
• Specializing in selling luxury garden furniture where price is less of an issue.
• Promoting the knowledge and experience of your sales people.
Because Gary's locations are not in such prestigious areas you need to promote other benefits to your customers. For example:
• Better parking facilities
• Avoid congested roads
• Open later in the evenings
• Sub-let part of your shop and offer café facilities
• Offer free or low-cost delivery to a wider area than GW
Each of these potential strategies would need to be researched further before any final decision is made. Information from an income statement serves as a guide, helping you decide on the best areas to research in greater depth. It helps to identify those areas that offer your organization the most effective way to improve your profitability and remain competitive.
When you use common-size income statements you can also compare your organization's figures to the average percentage figures for your industry. Publishers and trade associations compile such figures, which you can obtain if you subscribe to their publications or if you are a member of their association.
This Key Financial Ratios Checklist details the key financial ratios you can use to help you interpret financial information. This Financial Ratio Formulas Checklist provides you with a list of the most popular financial ratios used to assess an organization's performance, solvency, profitability and investment potential.
You may also be interested in:
Income Statement Definition | Income Statement Format | Multiple-Step Income Statement | Income Statement Explained | Operating Expenses Definition | Income Statement Ratios | Common-Size Analysis | Income Statement Cash Flow.