What Is a Statement of Operations? (Definition and Example)

Financial statements offer business owners, managers and potential investors valuable insight into an organization’s operations, providing detailed information regarding the company’s revenue and its expenses. Unlike other financial documents, the statement of operations breaks expenses down into operating costs and non-operating costs.

With accurate financial statements, you can assess your company’s financial position and make strategic decisions to boost its performance. As a CFO, business owner, or management-level employee, you may use the statement of operations to compare your business with industry standards and identify where you can cut your operating costs. For example, if your revenue is lower than the previous quarter, you can see if you’ve taken on any new operating expenses. You can also determine where to streamline your operations to save money.

Read on to learn about the specific components of a statement of operations.

A statement of operations, by definition, refers to the presentation of your company’s revenue, expenses, gains, and losses.¹ While some use the terms “statement of operations” and “income statement” interchangeably, there are some key differences between the two documents.

Income statements focus more on how your company is generating a profit. A statement of operations gives you insights into your business’s inner workings, including where you’re spending your money and potential changes you can make to lower your operating costs.

For example, rather than listing your operating costs as a single line item, the statement would likely break down your spending into categories such as marketing and sales, insurance payments, payroll, taxes, utility payments, rent and other administrative costs. This information helps you identify where your operating costs are increasing. You may notice that your utilities have gone up, for example, or see that your payroll spending is increasing.

Since you can usually create a statement of operations using standard accounting software, you can set it to measure any period of time you want. However, many companies run these statements every quarter to track their progress toward yearly financial goals and make adjustments as needed.  

To apply the data from a statement of operations to your decision-making process, you need to be familiar with its components. Each statement includes three sections: revenue, expenses and net income or loss.

• Revenue refers to how much money your company earned over a set period of time;² calculate your net revenue by subtracting your cost of goods sold from your total sales
• Following your revenue, the operations statement lists expenses incurred by your company over the same period; this includes standard operating expenses and other fixed expenses (such as mortgage or rent payment, property taxes and interest), which remain the same over a period of time
• Finally, your operations statement shows your net profit or loss after deducting the expenses from your gross profit  

When it comes to a statement of operations vs. an income statement, the main difference lies in the format. While both documents show you how much your company has made or lost in a given period, they each focus on different aspects of your company’s financial performance and health. An income statement offers more detail about your revenue, while a statement of operations focuses more on operating costs and includes more of them in the expenses section of the report.³

Your statement includes the following items:

• Sales (or revenue)
• Cost of goods sold
• Selling, general and administrative expenses
• Marketing and advertising
• Research and development
• Interest expenses 
• Taxes
• Net income

The statement lists your revenue at the top, starting with gross sales and deducting the cost of goods sold. Next, the statement breaks down all of your operating expenses, and net income (or a loss) is listed at the bottom.  

Imagine you’re analyzing the statement of operations for a company selling a product that brought in $100,000 in sales over a quarter. To make its product, your company spent $20,000 on materials and labor. In this case, your gross profit would be $80,000.

To sell your product, you spent $5,000 on marketing and an additional $60,000 in operating expenses for a total of $65,000. After deducting these expenses from your gross profit, your net profit for the quarter would be $15,000.

Your statement would break down the $60,000 in operating expenses to show the administrative costs, employee salaries and interest you might be paying on startup loans.⁴ 

Income statements offer a general overview of your business’ finances, going into more detail on your income. Your statement of operations includes revenue only from sales. Your income statement would list other sources of revenue, including investments or gains from the sale of assets.

As a CFO, you would evaluate your statement of operations with other financial documents to gain a holistic view of your company’s financial health. However, to make a case to potential investors about funding, you may present just your income statement. If you’re applying for a contract with a new client and you need to show that your business is financially stable, you may present your income statement with a balance sheet for the same time period.

Because your statement breaks down your expenses more thoroughly than an income statement, you can use it to assess how you’re spending money to run your business. For example, by looking at your operating expenses, you may see that your shipping and supply chain costs have increased compared to last year. In this case, you might start looking into other vendors and supply chain partners to help save money on your operations.

A statement of operations also gives you a picture of your financial health. When you run a statement every quarter, you can see if your company is trending toward an overall profit or loss for the year. This information helps you determine how to approach your sales for the rest of the year. You may choose to market your best-selling products aggressively to boost your bottom line, or you may refine your operational processes to save money over time.  

Becoming familiar with financial statements and how they differ will help you at every level of your career. Initially, these documents help you understand how your role contributes to your business’s financial goals. As a management-level employee or C-suite executive, you would use these financial statements to guide your decision-making.

When it comes to a statement of operations vs. a balance sheet, the balance sheet focuses on how your company is managing its resources.⁵ The balance sheet showcases:

• Assets: items that have value and could be used to fund your business, such as cash, inventory, land, trademarks, patents, office furniture and equipment
• Liabilities: your financial obligations, such as payroll, loans, interest and taxes
• Shareholder equity: your net worth after deducting liabilities from assets

A balance sheet shows whether your company can readily meet its financial obligations. If you have a healthy cushion of assets and few liabilities, you’ll have more money to spend on research and development and other business activities, meaning you’ll also likely be able to make more money.

A cash flow statement, on the other hand, shows your inbound and outbound circulation of cash from sales and other activities, including investing or selling off assets. This statement highlights your ability to pay your debts and other obligations. For example, if your company has a lot of assets but little cash, you would need to liquidate assets and wait for the sale to clear before you could pay your debt. If you have cash on hand, you can pay your debt immediately.  

Generating a statement of operations takes some time, and you might make some mistakes at first. Common mistakes include not categorizing your expenses correctly. You may underestimate your expenses by neglecting hidden costs such as permits or equipment repairs. Or you might transpose numbers when entering your data into your accounting system.⁶

Many business owners and managers also fail to regularly update their statements of operations. Keeping tabs on your net profit or loss throughout the year makes it easier to correct your course during a downturn.

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