Using Income Statements to make Decisions (CIE IGCSE Business)

• Income statements inform managers whether the business is making a profit or loss
  • They allow the comparison of performance to previous years, aid with future forecasts and can be used to make comparisons with competitors
    
    
• Finance managers are able to interrogate the data in order to make beneficial changes or set new strategic objectives

Example: Chillies Cafe

• Chillie's Cafe sells cold drinks during the summer season in central Berlin
• Its two best-selling products are bubble tea and smoothies

Diagram: BubbleTea versus Smoothies

• Although Chillie's sells bubble tea drinks at a higher price, smoothies are more profitable for the business
  • Fewer bubble tea drinks than smoothies are sold, so revenue is lower
  • The cost of sales of bubble tea are higher than those for smoothies
    
    

Questions to Consider when Analysing the Income Statement

Business is Making a Profit	Business is Making a Loss
Is the profit higher or lower than last year? If higher, what has the business done that could have led to this? E.g. Finding a cheaper supplier of raw materials or increasing sales due to a new promotional campaign   If lower, why is profit falling?  Have costs increased, such as higher energy bills for the premises, or have sales fallen due to a new competitor entering the market?	Is this a short-term or long-term problem? Lower profits may be a result of an external shock affecting all businesses, such as the 2020 Covid pandemic, in which many businesses had to close or reduce working hours   Some losses may be more long-term E.g. E-commerce growth has led to many high-street stores closing down as the number of customers has dwindled
Is the profit higher or lower than that of competitors? If lower, what can be done to become as profitable as other businesses? E.g. Does the business need to improve the quality of the products or increase the product portfolio?	Are competitors making losses? If they are, the business needs to consider whether the industry is changing to the point that it may become extinct Alternatively, it needs to ask tough questions about what can be done to evolve with changing market conditions