Understanding Financial Statements – Part 1

If you have a bookkeeper doing the books for you then I am sure you have received financial statements. Likely you get a P&L and a Balance sheet on a monthly basis. If you are doing your books yourself then you might know exactly what’s on a financial statement or why it is helpful. In this series we will walk through the financial statements. Here we will start with some basic definitions.

Revenue: Also referred to as sales or income is the amount of money that is generated from your primary business operations.

Cost of Goods Sold (COGS): Is the cost (both labor and materials) associated with the production of revenue. For example a florist’s cost of goods sold would include the cost of the actual flowers, the vase or holder, any other packaging and the labor time to create the bouquets.

Gross Margin: Also referred to as Gross Profit or Gross Income is Revenue minus Cost of Goods Sold

Gross Margin %: Equals the Gross Margin dollar amount divided by the Revenue amount.

SG&A: This stands for Selling, General and Administrative expenses. It represents the expenses incurred to run your business that are not part of the COGS. SG&A consists of things like rent, utilities and insurance.

Net Income: Net Income is what’s left over after you deduct all expenses from Income. There are several variations of Net Income but we can get into that in a later post. For now, just think of it as Revenue minus Cost of Goods Sold minus SG&A or Gross Margin – SG&A

P&L: Short for Profit and Loss Statement and also referred to as an income statement. This is a report that lists all of the amounts of aforementioned terms. Generally your bookkeeper will provide this to you on a monthly basis.

Assets: Things of value that your business owns. Examples are cash, inventory, Accounts Receivable, Fixed Assets, prepaids and a few others that we will get into at a later time. For now, just think of it of those things that have value.

Liabilities: The opposite of assets. These are the things you owe like bills that haven’t been paid yet, loans, salaries payable etc.

Equity: Equity is Assets minus Liabilities. This shows the net value of the business. Now this isn’t necessarily what you would sell the business but we can cover sale price and valuation in a later discussion.

Balance Sheet: A Balance Sheet is a standard financial report that categorizes everything into Assets, Liabilities and Equity as mentioned above. This is likely one of the standard reports that your bookkeeper provides you on a monthly basis.

In later posts we will go over each of the financial statements with some examples. If there is a topic that you would like to see covered, please leave it in the comments.

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