Common-Size Income Statements

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.

Common size income statements allow you to compare different sized organizations

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:

  • Gross Profit - there is a significant difference between the two organizations: GW's is 70% compared to GGF's 64%.
  • This is most likely due to GW's ability to negotiate better prices and delivery terms with manufacturers and wholesalers. They may even produce their own range in a low-wage economy, giving them better sales margins.
  • Because of its buying power, GW may be able to deal directly with certain manufacturers, whereas Gary's has to purchase through a wholesaler because their order is so much smaller.
  • Salaries - Gary's salary costs are significantly greater when you take into account their difference in size: GW's 27% compared to GGF's 31%.
  • Salaries make up over a quarter of the operating costs of GW and nearly a third for GGF. The most likely explanations are:
  • GW has fewer staff per square foot of their shops.
  • GW pays the majority of their staff minimum wage.
  • GGF is a family-run organization, so chooses to pay themselves more or offer better benefits to staff.
  • Rent - GW's rent bill is double (at 4%) that of GGF's.
  • This is because their stores are generally in more prestigious locations and proportionately larger than Gary's.
  • Operating Income - GW's is 35% compared to GGF's 27%
  • This 8% is a significant difference and is mainly due to the differences in Gross Profit, Salaries and Rent discussed above.

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.

Key Points

  • Common-size income statements using percentages can only be used to compare organizations of differing sizes.
  • These can provide valuable input into the management decision-making process.
  • Common-size income statements can also be used to compare your organization's figures to the average for your industry.
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