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Episode Synopsis "Profit and Loss Statement 101"
This episode dives into an important financial statement called the Profit and Loss Statement, sometimes referred to as the P&L or Income Statement. I break it down into three parts: Why we call it a Profit and Loss Statement, How it's structured and How it's useful to business owners for overall strategy and operations. An income statement is structured as follows: Revenue (top line) COGS (Cost of Goods Sold) Gross Profit Expenses Net Income (bottom line) I mentioned there are 4 major "landmarks" in the cash cycle, they are as follows: 1. Raw materials purchased (on credit, A/P or Accounts Payable created) 2. Pay your Suppliers ( A/P or Accounts Payable) 3. Sell Finished Goods to Customers( on credit, A/R or Accounts Receivables created) 4. Collect cash from clients (A/R or Accounts Receivables) Asset Management Ratios: DSI - Days in Inventory = Inventory over COGS/365 * This is time between #1 above and #3 above or how long it takes you to "flip" inventory. DSO - Days Sales Outstanding = A/R over Annual Net Sales/365 *This is the time from #3 above to #4 above or the time it takes you to collect your A/R from your customers. DPO - Days Payable Outstanding = A/P over COGS/365 * This is the time from #1 above to #2 above or how long it takes you to pay your suppliers. Cash Cycle = DSI +DSO - DPO * Remember, the cash cycle represents ho long you are using your cash. The longer the cash cycle the more you'll be dependent on lending and vice versa. Any other questions? Please put in the comment section!
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