An analogy of Financial Reports | KN95 Masks on Sale | COVID-19 News Updates
Happy Wednesday! (Huuuuu……. Huuuuuuuuuuummm…)
During our weekly leadership meeting, Gary (our Chief Administrative Steward) was giving the leadership team a refresher / class on financial statements (P&L, Balance Sheet, Cash Flow Statement). In an effort to help with some understanding I jumped in with an analogy that I personally really liked (it came to me in the moment), and I thought I would share it with you.
First, the overview of the financial statements.
In a business there are three primary financial statements used to monitor financial health and to inform decisions – the P&L, Balance Sheet, and Cash Flow Statement. You may or may not be familiar with these statements so I will, in my own words, explain what they tell you.
The P&L (profit and loss) statement, or Income Statement, shows your income, cost of the goods or services you are selling (COGS), expenses, and profit (or loss). Income minus cost of goods equals your gross profit. It is from this gross profit that you can pay your expenses, and what’s left over is your net income. Taxes are a factor but they only show up on the P&L if you are a C corp. Otherwise, if you are an S Corp or LLC the taxes are the responsibility of the shareholders each year and therefore do not show up as an expense in the business.
The Balance sheet shows the cash and assets of the business, as well as any liabilities – usually loans, but also the money you have booked as an expense but have not yet PAID. For instance, if you booked an expense for a vendor onto the P&L but have not yet sent the check, it shows up as a liability on the balance sheet in the “Accounts Payable” account. Glancing through the balance sheet you can see what cash you have in the bank, what people owe you (Accounts Receivable), what you owe as balances of loans and accounts payable, and also any “balance of value” of any fixed assets you purchased. For instance, if you bought a big ‘ol underwater basket weaving machine for $250,000 it is not (typically) able to be “expensed” on the P&L, and therefore shows up as an asset on the balance sheet. The IRS allows you to “depreciate” (write off) assets over a set amount of time, depending on the asset type, and to do that you transfer a piece of the value of that asset away from the balance sheet and onto the P&L. You are basically reducing the value of the asset and taking that reduction in value as an expense a little at a time. That one is maybe a little hard to wrap your head around without looking at it on paper.
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