How to Calculate a Common Size Income Statement

A standard income statement tells you a story in absolute dollars, but a common size income statement reveals the crucial relationships between those dollars. This technique transforms every line item into a percentage of total revenue, making it one of the most effective ways to analyze a company's performance over time and against its competitors. This article will show you exactly how to calculate and interpret a common size income statement to uncover insights hidden in the numbers.

What is a Common Size Income Statement, and Why is it Useful?

A common size income statement presents each line item as a percentage of a single base figure—in this case, total revenue. Total revenue is always set to 100%, and every other item on the statement, from the Cost of Goods Sold (COGS) to Net Income, is shown as a percentage of that 100%. This process, also known as vertical analysis, strips away the effects of company size, allowing for more meaningful comparisons.

Imagine comparing a small local bakery that made $200,000 in revenue with a national bakery chain that made $20 million. Looking at their standard income statements side-by-side is unhelpful; the dollar amounts are just too different. But what if you knew the local bakery’s ingredient costs were 30% of its revenue, while the national chain’s costs were 45%? Suddenly, you have a valuable insight: the small bakery is more efficient at managing its direct costs relative to its sales. This is the power of a common size analysis.

This technique offers three key advantages:

• Trend Analysis: By comparing common size income statements from several consecutive years, you can quickly spot emerging trends. Is your sales and marketing expense shrinking as a percentage of revenue? Are your operating costs creeping up even as sales grow? These patterns are much easier to see when expressed in constant percentages.
• Competitive Benchmarking: How do your profit margins stack up against your biggest competitor or the industry average? A common size analysis allows you to perform an apples-to-apples comparison of operational efficiency, profitability, and cost structure, regardless of differences in overall company size.
• Improved Decision Making: The insights gained from a common size statement directly inform strategic decisions. If you discover your gross margin percentage is declining year-over-year, it can trigger an investigation into your pricing strategy, supplier costs, or production efficiency before the problem becomes critical.

How to Create a Common Size Income Statement: A Step-by-Step Guide

Calculating a common size income statement is straightforward. You don’t need complex software—just your income statements and a simple spreadsheet. The core formula you'll use for every single line item is:

(Income Statement Line Item / Total Revenue) * 100 = Line Item Percentage

Let's walk through the process from start to finish with a practical example. We’ll analyze a hypothetical business, "Creative Widgets Inc.," for the past two years.

Step 1: Gather Your Income Statements

First, you need the raw data. Pull the income statements for the periods you want to compare. This could be two consecutive years, quarterly reports, or even monthly statements. For this exercise, you can export these reports directly from your accounting software, whether you use a platform like QuickBooks Online or Xero. For competitive benchmarking, you’ll need the financial statements of the company you want to analyze, which are often available for public companies through their investor relations websites.

Here is the standard income statement data for Creative Widgets Inc. for 2023 and 2024:

Line Item

2024 ($)

2023 ($)

Total Revenue

$1,200,000

$1,000,000

Cost of Goods Sold (COGS)

$540,000

$420,000

Gross Profit

$660,000

$580,000

Operating Expenses:

Sales & Marketing

$180,000

$120,000

Research & Development

$120,000

$100,000

General & Administrative

$144,000

$130,000

Total Operating Expenses

$444,000

$350,000

Operating Income

$216,000

$230,000

Interest Expense

$24,000

$25,000

Income Before Tax

$192,000

$205,000

Income Tax Expense

$40,320

$43,050

Net Income

$151,680

$161,950

Step 2: Set Up Your Spreadsheet

Create a few new columns next to your dollar-value columns. You’ll want one column for the common size percentage for each period you are analyzing. Your spreadsheet should now look something like this:

Line Item

2024 ($)

2024 (%)

2023 ($)

2023 (%)

...

...

[Calculation]

...

[Calculation]

Step 3: Apply the Formula to Every Line Item

Now, fill in the percentage columns. For each year, divide every single line item by that year's Total Revenue. Make Total Revenue 100% for each period.

For 2024 (Total Revenue = $1,200,000):

• Total Revenue: ($1,200,000 / $1,200,000) * 100 = 100.0%
• COGS: ($540,000 / $1,200,000) * 100 = 45.0%
• Gross Profit: ($660,000 / $1,200,000) * 100 = 55.0%
• Sales & Marketing: ($180,000 / $1,200,000) * 100 = 15.0%
• Net Income: ($151,680 / $1,200,000) * 100 = 12.6%

For 2023 (Total Revenue = $1,000,000):

• Total Revenue: ($1,000,000 / $1,000,000) * 100 = 100.0%
• COGS: ($420,000 / $1,000,000) * 100 = 42.0%
• Gross Profit: ($580,000 / $1,000,000) * 100 = 58.0%
• Sales & Marketing: ($120,000 / $1,000,000) * 100 = 12.0%
• Net Income: ($161,950 / $1,000,000) * 100 = 16.2%

By applying this calculation down the entire statement, you get your completed common size income statement:

Line Item

2024 ($)

2024 (%) ▼

2023 ($)

2023 (%)

Total Revenue

$1,200,000

100.0%

$1,000,000

100.0%

Cost of Goods Sold (COGS)

$540,000

45.0%

$420,000

42.0%

Gross Profit

$660,000

55.0%

$580,000

58.0%

Operating Expenses:

Sales & Marketing

$180,000

15.0%

$120,000

12.0%

Research & Development

$120,000

10.0%

$100,000

10.0%

General & Administrative

$144,000

12.0%

$130,000

13.0%

Total Operating Expenses

$444,000

37.0%

$350,000

35.0%

Operating Income

$216,000

18.0%

$230,000

23.0%

Interest Expense

$24,000

2.0%

$25,000

2.5%

Income Before Tax

$192,000

16.0%

$205,000

20.5%

Income Tax Expense

$40,320

3.4%

$43,050

4.3%

Net Income

$151,680

12.6%

$161,950

16.2%

Interpreting the Results: Turning Percentages into Actionable Business Intelligence

The calculation is the easy part; the real value comes from interpreting what the percentages tell you. Looking at the results for Creative Widgets Inc., the dollar-based statement shows a growing business—revenue is up 20% and gross profit an impressive $80,000. However, the common size analysis tells a more concerning story.

Gross Profit Margin is shrinking. While gross profit in dollars increased, the gross profit margin fell from 58% to 55%. This is a red flag. It's happening because COGS increased as a percentage of sales from 42% to 45%. For every dollar of sales in 2024, the company is keeping three cents less to cover operating costs and profit. Management must now investigate: Have raw material prices increased? Is direct labor less efficient? Is there pricing pressure forcing a lower per-unit profit?

Operating Expenses are on the rise. Total operating expenses grew from 35% of revenue to 37%. We can dig deeper:

• Sales & Marketing jumped from 12% to 15%. This might be a conscious strategic choice to fuel growth, but the question becomes: is the investment paying off? Revenue grew 20%, but the marketing budget grew by 50% in absolute dollar terms ($120k to $180k). This analysis prompts a review of marketing ROI.
• R&D remained steady at 10%, indicating a consistent investment in innovation relative to company size.
• General & Administrative expenses actually became more efficient, decreasing from 13% to 12%. This is a positive sign that general overhead is being well-managed as the company scales.

Profitability is declining significantly. This is the most critical insight. Net income as a percentage of revenue—the net profit margin—dropped from 16.2% to 12.6%. Despite revenue growth, the company is becoming significantly less profitable. Shrinking gross margins and rising sales costs are eroding the bottom line. This common size statement shows that while top-line growth is strong, the underlying financial health of the business is weakening and requires immediate attention.

Final Thoughts

Creating a common size income statement is a powerful yet simple technique for any financial professional. By expressing each value as a percentage of total revenue, you can effectively analyze cost structures, spot developing trends, and benchmark performance against competitors, all without the distorting effect of absolute dollar amounts.

After finding patterns in the data, the next step is often to understand the tax implications of potential business decisions, like restructuring costs or changing entity type to improve profitability. When complex tax questions come up, our AI research assistant, Feather AI, provides swift and trustworthy support. We deliver instant, citation-backed answers from authoritative IRS and state sources, so you can focus on providing strategic advice instead of getting lost in manual research.