What the Income Statement Tells You

Why understanding this financial statement is essential for business owners and real estate investors.

When applying for commercial bank financing, one of the first documents a lender will review is your income statement—also known as the profit and loss statement (P&L). It’s more than just a snapshot of revenue and expenses. It tells the story of how your business generates profit, manages costs, and sustains operations over time.

Understanding what your income statement says (and doesn’t say) is essential—not just for meeting lender requirements, but for making better business decisions.

What Is the Income Statement?

The income statement summarizes your business’s revenues, costs, and expenses over a specific period (monthly, quarterly, or annually). It shows whether your company is making a profit or operating at a loss.

At its core, the income statement answers the question:
"Is the business profitable?"

But for lenders and investors, it also answers a few more:

• Is the business growing?

• How stable is the revenue stream?

• Are expenses being controlled?

• Can the business support debt payments?

Let’s break it down.

Key Components of the Income Statement

1. Revenue (Top Line):
   This is the total income from sales or services before any expenses are deducted. A lender wants to see consistent or growing revenue as a sign of a healthy business or investment.

2. Cost of Goods Sold (COGS):
   Direct costs tied to producing your product or service. For example, in real estate development, contracting and manufacturing, this includes labor and materials. For retailers and wholesalers, this includes inventory and merchandising costs. High COGS can squeeze profit margins and signal operational inefficiencies.

3. Gross Profit:
   Revenue minus COGS. This tells you how efficiently your core operations are running or how effective your pricing strategies are before overhead and administrative costs.

4. Operating Expenses:
   These include rent, salaries, marketing, insurance, and general overhead. Monitoring these costs is key to ensuring they don’t erode your profitability. It also measures how effectively you deploy resources such as administrative, sales and marketing.

5. Operating Income (EBIT):
   Earnings before interest and taxes. This reflects your business’s core profitability.

6. Net Income (Bottom Line):
   What’s left after all expenses, including interest and taxes. This is your profit—and the number lenders often hone in on.

Why Lenders Care

Banks and commercial lenders use your income statement to assess:

• Cash flow coverage: Can the business afford loan payments?

• Stability and trends: Are profits consistent or volatile?

• Profit margins: How efficiently is the business managed?

• Debt capacity: Is there room to take on more financing without straining operations?

Your income statement helps tell the story of your financial health. If it shows consistent profitability and well-managed expenses, it builds confidence with lenders. If there are losses or erratic trends, expect to be asked why—and be prepared with an explanation.

What the Income Statement Doesn’t Show

While it’s a critical document, the income statement doesn’t provide a full picture. It doesn’t show:

• Your current asset-liability financial health such as cash and liquidity position, working capital, debt, equity and leverage (that’s the balance sheet)

• How money is being spent or earned over time (that’s the cash flow statement)

• Accounting methodologies such as inventory valuation and fixed assets depreciation, long term debt payment terms, lease obligations and contingent liabilities (found in supplemental schedules and footnotes)

That’s why lenders ask for all three financial statements to evaluate creditworthiness.

Final Thoughts

Understanding your income statement isn’t just about checking a box on a loan application. It’s about gaining insight into how your business or investment performs—and using that insight to grow, improve, and secure financing with confidence.

At Premier Credit Insight and Solutions, we help business owners and real estate investors prepare strong financial packages for commercial lending. If you need help interpreting your income statement or positioning your business for bank financing, reach out to us today.