Our company has grown by leaps and bounds over the last several years. I have an MBA, but quickly learned that knowing the mechanics of finances is vastly different than knowing the meaning of them. This article is meant to illustrate some of the things that I have learned over the years through trial and error – so that hopefully you do not have to go through all the hard lessons that I have.
Here’s what a P&L will typically look like:
– COGS (Cost of Goods Sold)
– Variable Costs
– Overhead Expenses
1. Net Income is a theory. In full disclosureI stole this phrase from Keith Cunningham, but it is the truest thing that you have ever heard.Net income actually represents the increase in value of the company in the short term.
Just because you made the honor roll your freshman year, it does not mean you are on your way to an Honor’s Diploma, although you do have potential.
2. Net Income ≠ Cash. Just becauseyou show a “profit” at the end of the day, it does not mean you made any money. Just because you sold something, it does not mean you have been paid for it yet. If I pay for a widget today for $10 and sell it someone Net 30 for $25 I will show a $15 increase in Net Income. If you look at my bank account I show -$10…
3. Many words mean the same things. Accounting is not necessarily a universal language, although all meanings are the same. Below is a list of words and their equivalents:
Income Statement = Profit and Loss = P&L
Sales = Income = Revenue
Salaries = Wages
Cost of Goods Sold = COGS = Bill of Materials = BOM
There are many others, but you get the point…
4. Expenses do add up. The second half of Income Statement is all your overhead expenses. These are expenses you incur at a more constant rate and are not tied directly to how much you sell. In tis category you will find your rent, taxes, marketing, travel and salary costs. You have to watch these as many company owners mark up their products and services and assume they are covering these costs. In actuality, they should assume these costs and price their goods and/or services accordingly.
5. A rising tide can sink all ships. Variable costs (or variable expenses) are the costs that ebb and flow with your sales. These include shipping and boxes and tape and all of the small things that you use each time you sell something. These typically get lower (in terms of percentage) as you sell more – but it is something that needs to watched.
There are more thing to watch than just the 5 items above. If you keep the items above in mind while working on your business, you will be ahead of 95% of the other business owners out there. For more information on how to build your business, check out www.ScorpionCoatings.com. Until next time!