For many new in the business world, reading an income statement can be a confusing and intimidating experience. However if you know where to look you will realize that it is not as intimidating as it may appear. Understanding an income statement is a very important skill to have for entrepreneurs as it aids with making sound business decisions. Basically, an income statement tells you how much money came into your company during a specific period, how much a business spent in order to generate income, and how much profit a business has after having paid all expenses. Here are a few points that will make income statements easier to understand.
- Income statements cover a period of time
Before you delve into reading the income statement, make sure to take note of the specific time period covered. Questions you should be able to answer for the said period include: What are the revenues of the company during the period? Have the revenues increased or decreased over the last few periods? What are the various components of cost? How profitable was the company during this period? What are the earnings attributable to a share or the Earnings per Share?
- Income statements follow a simple formula
Income statements may have slight variations, depending on the company. However, they all possess the same data. Essentially, total revenue, total expenses, and net income (Total revenue-total expenses= Net income). Additional information is simply added in order to give the reader a more detailed depiction of financial status.
- Don’t let the jargon throw you off
What can make income statements difficult to understand is wording. Keep in mind that businesses can use different words to describe the same concept. For instance, the term “sale” or “income” can be used instead of “revenue”. The word “expenses” can be used instead “costs.” “Profits” and “net income” are also interchangeable.
- Expenses are often split into different parts
Expenses tend to be broken down into components. Cost of Goods Sold is the direct cost attributable to goods sold. Selling, General and Administrative Expenses combines payroll costs, except for what has been included in labour costs. Depreciation and amortization are charges with regards to fixed and intangible assets that have been capitalized on the balance sheet over time. Sales & marketing, as well as Research & Development costs are also almost always included in income statements.
- Keep an eye for cash flow
Comparing an income statement to a cash flow statement is highly recommended. The reason for this is to see if the profits earned are supported by the cash coming into the company. High profits on an income statement paired with low cash flow can imply weak quality of earnings. Know your key drivers and manage them. Keep a careful eye on areas that affect cash flow: accounts receivable collections and inventory turnover. How are you doing compared to past performance and your peers? Watch key areas that affect profits, net and gross margins, labor and fixed asset utilization. Though this is more acceptable with start-ups since they likely have to make substantial inventory investment before collecting from customers, this is something that should improve over time.
- Take note of the profit margin and earnings per share
The profit margin will give you an indication of the percentage of revenue that is left for shareholders after expenses are paid. Earnings per share will tell you the portion of earnings you would be entitled to if you owned one share.
Income statements can be very intimidating if you are a first-time business owner. If you are an entrepreneur needing help with your financial statements, remember that some aspects of running a business are not worth saving money on. There’s no need to turn yourself into a CPA, but you must be able to read financial statements, talk with better qualified financial people and assess your company’s performance.This will lower your stress level and get the job done efficiently.
Mentorship is at the heart of PME’s success. On this 18th anniversary, it would only be appropriate to give thanks to our mentors. Our mentors spend countless hours helping our entrepreneurs reach their full potential. We recently got the chance to catch up with our longtime mentor, Me Nancy Cleman. Nancy is a member of the Quebec Bar and the law society of Upper Canada. Over her years of experience, she has provided legal advice to a variety of corporate and commercial clients, including a range of industries such as software, fashion, film and services for the elderly. Nancy is also an accomplished speaker and author. Here are her thoughts on mentorship, and why it matters.
Q: What aspects of mentorship do you enjoy most?
A: What I enjoy most about mentorship is being introduced to entrepreneurs and learning about their visions. Speaking to them and offering guidance businesses they are seeking to build is an essential part of being a mentor. I enjoy offering perspective and working collaboratively with entrepreneurs.
Q: How can an entrepreneur make the best out of their relationship with their mentor?
A: The entrepreneur can make the best of the relationship by respecting the relationship that is being built with a mentor. As mentors, we get many calls, however often times there is no follow up. The relationship of mentor and mentee is one of respect and trust. Mutual trust and respect is the only way of getting the work done in an efficient manner.
Q: What advice would you give an entrepreneur thinking of working with a mentor?
A: It is important to listen and to be clear with the facts. Thank the mentor for his or her time. If you have an appointment then keep it or tell the mentor, you cannot make it. Mentorship is a rewarding relationship for both parties. As a mentor, I benefit from the opportunity to learn new things and share my experiences.
Our mentors are passionate people dedicated to helping others. With their help, entrepreneurs have been able to reach great heights. Thanks to the efforts and unwavering dedication of professionals like Nancy, we look forward to what the next 18 years have in store for PME.
The term economic moat, coined and popularized by Warren Buffett, refers to a business ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Imagine McDonald’s without cost, convenience and golden arches, Nike without technological and trademarked innovation, or Amazon without its timely customer service innovations. They would be relatively unpopular companies struggling to survive in their respective industries. Business mogul, Warren Buffet has introduced the world to many of his lifelong lessons over the decades. One of the lessons that seems to have stayed relevant throughout the years is related to the coined term, “economic moat”.
As the age-old saying goes: Being the best is great because you’re number one, but being unique is greater because you’re the only one. Buffet has explained the importance of economic moats specifically when describing his investment strategy. His strategy centers on companies with strong economic moats, as they are more likely to withstand their competitors, and remain successful and unique. A company having a competitive advantage that further differentiates it from the competition will help through the highs and lows of operating a business. In its most basic form, a company without an economic moat is like a movie without an engaging hero, or storyline. In such a situation, there would be no way of creating a loyal consumer following, and subsequently no way of overcoming challenges that arise over time. On the other end of the spectrum, companies with competitive advantages can be threatened by competitors who replicate their methods. Establishing economic moats can therefore help companies protect long-term profits.
Thankfully for today’s business leaders, Buffet didn’t simply coin a theory-based term that required a bunch of scholarly analysis. The concept of building economic moats is a tangible one that can be leveraged through different business strategies. For instance, economic moats can be achieved in five ways: cost advantages, the network effect, high customer switching cost, efficient scale and intangible assets. The way you choose to build your economic moats all depends on the nature of your business. Think about what would be a good fit for the strategy you plan to execute. Buffet emphasizes the economic moat as an institution. It is not the mere elements that customers will like. Companies that build moats carve them around their businesses to keep competitors at bay. For instance, people loved Coca-Cola 50 years ago, and it’s fair to assume that they will 50 years from now. This is because Coca-Cola utilized the five sources of economic moats in order to create a loyal consumer base.
Let’s use the example of low-cost advantage. Suppose you have decided to make your fortune by running a lemonade stand. If you buy lemons in bulk once a week instead of every morning, you can reduce your expenses by 30%. This allows you to undercut prices of competing lemonade stands. While profits would increase, it wouldn’t take long for competitors to notice your method and replicate it. However, suppose you develop and patent a juicing technology. This technology would allow you to get 30% more juice out of the average lemon. This time, it would be a lot more difficult for the competition to duplicate. In this example, your economic moat is the patent that you hold on your proprietary technology.
The nature of capitalism is that others will want to come in and take what you have built. The goal for every business should be to build a durable fort around its castle. The goal is to protect it from any attack that would come from the competition. Sometimes an economic moat is having more talent, other times it’s establishing legally protected patents. Just remember to remain patient. You should stay persistent because it may even take a few tries until you get your strategy right.
Over the past 18 years PME has helped guide many diverse businesses to success. Often, entrepreneurs come to us with just an outline of what they aim to achieve. With added assistance from our program leaders, mentors, and committee members, we are able to turn this vision into reality. Here are just a few notable mentions of companies that have been able to turn ideas into lucrative business opportunities with help from PME.
Not only do they have millions of downloads for their games, they have become members of the PME committee. The mission of Budge Studios is to thrill, educate, and entertain children around the world through creative and innovative apps. They have won numerous notable awards for their accomplishments. This includes the Google Play ‘Best of 2016’ App Selection Award for their app, My Little Pony: Harmony Quest. Additionally, they won the Apple Store Best of 2016 for Miss Hollywood Vacation Canada. Budge Studios may be in the business of creating games but their business strategy and objective is rigid and direct. It’s all about being family friendly and universally playable.
Naked and Famous Denim
Naked and Famous Jeans has come a long way since we first met Brandon Svarc. Simply put, the company focuses on one thing only. As they so eloquently state: “No marketing, no washes, no pre-distressing, no nonsense. Just excellent denim at a reasonable price.” Naked and Famous Jeans uses Japanese selvedge denim which is woven slowly and painstakingly on old shuttle looms. Svarc travels to Japan numerous times a year to find new fabrics, and denim mills. Nicknamed the Willy Wonka of denim, he has been interviewed by popular publications such as GQ to share knowledge about his expertise. With all their products made and sewn in Canada,their sole purpose is to sell the highest level of quality to their end-user.
CoPower is where impact investment meets Wall Street. We met founders David Berliner, Larry Markowitz and Raphael Bouskila in 2013. Since then, CoPower has continued to strive and make the world a greener and more sustainable place. CoPower’s team works with clean energy firms to identify clean energy and energy efficient projects that generate steady and predictable revenue streams. CoPower is all about impact investing. For those of you who are unsure of what this is, impact investing is a strategy that involves the investing in companies and projects with the intention of generating measurable, positive, and environmental benefits alongside financial returns.
Not only are Navi and Daniel kick-ass entrepreneurs, but did you know they had the biggest kickstarter campaign in Canadian history? Revols has come a long way since its founding in 2014. Navi and Daniel were endlessly frustrated with finding the perfect pair of earphones. While they understood that ears are as unique as fingerprints, all custom-fit earphones came with a high price-point and long wait times. The dynamic duo decided to take matters into their own hands and create Revols: a pair of wireless customized earphones that provide the same comfort and sound benefits as traditional custom-fits, at a fraction of the cost and time.
All in all, PME has had some pretty driven, and ambitious entrepreneurs come through its doors. This is just a glimpse of many of our success stories. We provide them with the most essential tools entrepreneurs need in order to succeed.