0:24
Although simple in format, there can obviously be a lot of subtleties.
My goal is to lay out the components of the structure in a way that's easy to
digest and will provide you with basics need to develop an understanding
of this important document.
My goal in the following slides is to highlight each key component in a manner.
There also represent how to align in typical income statement format, so
let's get going.
Before we get started, I do want to point out that in financial lingo you often hear
different terms to represent used to represent the same item.
I'm going to try my best to highlight these subtleties as we move
through our lesson.
As mentioned in the previous slide, my goal is to give you an over view of
the function of each statement as well as the typical structure.
Also to show you how the numbers change as we build out the complexity of
the document.
Let's start with the term gross revenue or sometimes known as gross sales.
Quite simply revenue is income that you have earned through
the sale of your product or service.
One note I will make at this point that is often not understood by some first time
entrepreneurs, is that sales and
service taxes should not be included in any revenue line.
Remember that these taxes are technically paid by your customers, not by you.
You're merely responsible for distributing these funds back to the state and
therefore they have no representation under companies financial figures.
So make sure to remove those items prior to coming up with gross revenue.
The first item we'll account for
as well as look at in this financial statement is the concept of returns.
It's the nature of all businesses that you'll have to deal with a client who's
unhappy with the product or service and request a refund of their purchase.
These numbers must be accounted for as they obviously effect the amount of
revenue available for you to cover your expenses.
Once these negative sales are accounted for,
you're locked at the number that is known as net revue or net sales.
Remember that the frequency and
expectation regarding returns will very greatly depending on your industry.
For instance, a retailer selling clothing will try to account for
a much higher number of returns than say a cleaning company.
Someone is much more likely to return an ill fitting piece of clothing
than to call and demand a refund on cleaning services.
Also remember that as a small business owner, you should develop clear and
concise return policies so that you're protected from returns.
And make sure that you clearly broadcast to your customers to read and
comprehend these.
Printed directly under receipts is one of the best ideas.
The next set I want to talk about is the concept of cost of goods sold or
COGS as they're often referred to as.
This line item is specific to the types of businesses which have a physical product
that can be inventoried or held.
So it's not overly relevant to service based companies unless of course,
they offer physical products along with their services.
A great example of this would be a hotel, which rents rooms as a service.
An activity which technically has no cost to good sold they may also sell goods in
a gift shop which would in fact have COGS, because there is inventory that backs up.
3:19
The example in the current slide shows a company with a beginning inventory value
of $70,000.
This is a fictional figure which I'm using as an example.
And over the course of this time period,
purchased an additional $25,000 in inventory.
At the end of this period, the remaining inventory value is only $7,000.
Therefore to calculate the cost of goods sold, we add the beginning inventory
with new purchases and subtract the remaining inventory value,
which leads us to the cost of goods number of $88,000.
After calculating COGS this brings us to the calculation of gross profit,
which is the your net revenue lest your cost of goods sold.
This figure can give you a good indication of whether or not you have a healthy
profit margin based on you price of goods sold and pricing strategy.
To calculate gross profit margin you must divide gross profit by net revenue.
In our example,
we have gross profit margin or 77%, which is an extremely healthy number.
Knowing this figure will allow you to benchmark your company against others in
your sector, and to ensure that you are performing at or above average.
Now that we've calculated our gross profit,
we can move on to the expense side of our income statement.
4:25
For the purposes of highlighting the details of the expense categories,
I have edited our example spreadsheet, so
we no longer are looking at the revenue side of the equation.
Once we have completed the expense worksheet,
we'll then bring the two pieces together for our final calculations.
Generally speaking,
expenses can be contributed to one of two categories, either variable or fixed.
Variable expenses are those that are changed
based on the growth of the company.
The majority of variable expenses are often accounted for
in cost to goods sold calculations, as they tend to deal with economies of scale.
For example, the cost of raw goods needed to build a product
will decrease based on the size of the order placed with your supplier.
However, other variable costs not directly tied to COGS.
Could be commissions paid to a salary work force, transportation cost,
credit card processing fees just to name a few.
The way to test whether or not a cost is variable is to determine whether or
not the amount paid is going to be directly attributable
to the volume of potential sales you make.
The answer is yes, then it's likely to be a variable cost.
5:23
Now let's talk about fixed expenses.
It's important to point out that fixed expenses do in fact change over time.
But they're not directly impacted by the change in sales volume as those designated
as variable costs.
For example, your rent will obviously increase over time due to inflation and
market conditions.
But these changes are usually on a yearly basis, and
not correlated to the company's performance or sales activity.
Other fixed costs often include salaries, insurance, utilities, and
other predictable expenses.
Now that we have our total expenses calculated,
we can pull the income statement together.
Let's take a look at the final product.
So here we are, I've highlighted the two key numbers that we have calculated.
On the revenue side of the equation we generated a gross profit of $292,000 and
our expenses we've calculated 182,500.
To wrap up this example, I've executed the equation that we started with revenue or
gross profit minus expenses equals net income.
Now that we've walked through this fictional income statement,
I'd like to provide you with a few closing remarks.
Firstly, I would like to reiterate that the lesson we just completed was,
obviously, a fictional representation to help you visualize the terminology and
structure of a basic income statement.
We kept things very simple so you could establish a base.
The lesson five will cover the development of ProFinMe or
Projected Financial Statements.
We will discuss in more detail the complexity of your own business statement.
6:42
Secondly, now's the time to start your industry research.
Often times entrepreneurs don't know where to begin when it comes to developing
all the line up that must go for their potential income statement.
Luckily the internet is full of information that can help you get started.
A simple image search in Google for income statements will bring back a ton
of examples that will allow you to explore the different layouts and
line items developed by all sorts of industries and companies.
Start exploring now.
Lastly, it's time to start building your drafting income statement.
Utilize your research in the example we walk through to begin laying out
your own document that would match your business concept.
You can read a million different articles on income statements and
financial documents, but nothing beats trying it on your own.
The funny thing is that once you begin building your own,
you will find it very empowering.
Next up, we'll cover the basic structure and terminology of the balance sheet.
Let's get going.
[MUSIC]
Ken SzymusiakManaging Director, Burgess Institute for Entrepreneurship & Innovation
Forrest S. CarterAssociate Professor, Faculty Director of Institute of Entrepreneurship and Innovation
David WheelerCreative Research Faculty, The Hub for Innovation
