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Cracking the code of the Income Statement
It consists of three main categories:
- Sales or revenue during a given time period. It includes sales (revenue) and Earnings-per-share (EPS)
- Costs and expenses: “Above the line” are the cost of goods sold (COGS), cost of services (COS). “Below the line” are operating expenses, interest, taxes, depreciation and amortization.
- Profit: Profit is an estimate. You can’t spend estimates.
Different kinds of profit:
- Profit = Revenue - expenses
- Gross profit = Sales - COGS
- Operating profit (EBIT) = Gross Profit - Operating expenses
- Net Profit = Operating Profit - (interest + taxes + other costs)
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Understanding how the numbers are used and what are assumptions puts you in control of the decisions.
Financially intelligent managers understand the four distinct skill sets:
The art of accounting is taking a limited set of data to get an accurate description of how well a company is doing.
Accountants use accruals and allocations to attempt an accurate picture of the business for a month.
A balance sheet shows what a business owns at a particular time. A balance sheet always balances. Assets = liabilities + owners’ equity.
Profit is not cash. A healthy business needs both profit and cash.
A good manager is aware of how both cash and profits affect a balance sheet. A balance sheet shows if a company is financially healthy.
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This book teaches the fundamentals of owner compensation, profit targets, labour productivity, cash flow, and data reporting. Clear explanations and helpful illustrations throughout make it a must-read guide for small business owners looking to achieve higher profits.
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