Your Daily Report is a tiny income statement, printed every evening. Most teams read only its last number. This week you read the whole thing, and find the one day your cash and your profit disagree.
Learning objectives. After this week you can (1) build a simple income statement; (2) use the balance sheet equation; and (3) explain why profit and cash are not the same thing.
Remember this: the income statement is a movie of a period. The balance sheet is a photo of one moment.
1) The income statement (P&L)
Net Income = Revenue − Expenses
Gross Profit = Revenue − Cost of Goods Sold
Revenue is money earned from sales; an expense is a cost of earning it. Cost of goods sold is the direct cost of what you sold: on your report, Ingredients your sales used. A negative net income is a loss.
| Line | Amount |
|---|---|
| Revenue | $1,500 |
| Cost of goods sold (ingredients your sales used) | −$480 |
| Gross profit | $1,020 |
| Other expenses (wages, fixed, marketing, spoilage) | −$700 |
| Net income | $320 |
2) The balance sheet
Assets = Liabilities + Equity
Assets are what the business owns (cash, inventory, the truck). Liabilities are what it owes (a loan, an unpaid bill). Equity is the owners' claim on what is left. Assets $10,000 and liabilities $6,000 leave equity of $4,000. The equation always balances.
3) Profit is not cash
Cash flow is cash actually moving in and out. In real businesses it drifts away from profit when customers pay later, or when cash buys inventory or equipment: that is an asset swap, cash down and another asset up, with no expense yet. Businesses fail when they run out of cash, even while profitable.
In the arena, with one truck, your Bank moves by exactly Net today on almost every day. The exceptions are buying or selling a truck: buy a $10,000 truck and Bank drops $10,000 that day, while Net today does not count it as an expense.
Quick self-check
(a) Revenue $2,000, expenses $1,500: net income? (b) Assets $12,000, liabilities $5,000: equity? (c) Bank was $40,000. Today's Net is +$300 and you bought a $10,000 truck. Tonight's Bank? (Answers: $500; $7,000; $30,300.)
Common mistakes
- Treating profit as cash. A good P&L can sit next to a shrinking bank balance.
- Mixing up the statements. Income statement: a period. Balance sheet: one moment.
- Using prep bought as cost of goods sold. COGS is only what your sales used.
This week in the arena
Build the five-line income statement above from one of your own Daily Reports. Then compare that day's Bank with the day before: did it change by exactly Net today? If not, find the reason and report it.