What is the cost of service and why is it important to my business? How can financial statements help me?
The cost of service plays an important part in your business income. It is deducted from revenue in arriving at your “gross margin.” All other costs are known as operating costs and are deducted from the gross margin to calculate net income and your net margin percentage. Examples of operating costs, also called selling, general, and administrative costs, include management salary, rent, insurance, professional fees, bank fees, filing, registration, permit, memberships, annual fees, applications fees, dues, and subscriptions. A percentage based income statement will give you an idea of how much margin you get from each incremental dollar of revenue. For example, your business may have an industry average net margin of 15% while you are making only 10%. A percentage analysis of your income statement will help you determine which particular costs you need to control to raise your net margin percentage. However, obviously a big focus is always on the “top line,” i.e. revenue. In a strict
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