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.