Revenue, Expenses, and.... no Profit?! Oh, My!

I was asked by a good friend (I can call you that, right?) if I would be so kind as to write a post on P&L's - aka Profit & Loss statements, Income Statements, or Statement of Operations for all y'alls that are unfamiliar with cool accounting lingo. Who am I to pass up such a bodacious request?!

Let's start simple - (a very fine place to start) - let's start with... income. You know you love it - Say it with me! "Show me the money! Woot Woot!" (I think the editors cut part of that in the movie, but I'm not totally sure). Most people think of income as their hourly (or salary) wage.

For example:
If you were to make $10 an hour, and you worked 40 hours in a week, would you get $400 in your paycheck? Heck no. "Well, Mr. 'Numbers Guy' why is that?" Well, it's easy. Your paycheck is a basic example of a P&L. The absolute basics of a P&L are...(drumroll please)...

Revenue (Your 10 big ones for every hour of your life that you give to your boss)
- Expenses/Cost of goods sold (The portion of your hard-earned money that Obama gets to waste)
= Gross Profit
- Operating Expenses (any pre-tax deductions like retirement or insurance)
= Net Profit (What actually goes into your bank account to buy some bling-bling)

Now, in the confusion of all this edumacation, the thing I want to get across the most is the difference between Gross Profit and NET Profit. Is there really that big of a difference?! Oh ya, baby. Lemme splain. If I were to say to you "Hey, I'm in charge of casting the movie on the history of the New Kids on the Block and thought you'd make a great Joey." You'd say, "Dude, that's totaly rockin' rad! I know it'll make a ton of cazash!" (or whatever it is you kids say these days). Then I tell you the best news EVER - "I'm prepared to offer you the most lucrative deal in the history of NKOTB movies - 25% of the net income." You sit in silence as you contemplate all the slap bracelets and trapper keepers you could buy with that kind of scratch.

We make the movie - it's wildly successful - and I send you on your way with the promise that I'll mail you a check whenever we realize a net profit. You can hardly wait to get your hands on a sweet new walkman. Only problem - I never send you money, and you never get to listen to Madonna sing "Material Girl" while walking down the street. Why?! Well, unfortunately, with all the expenses of the movie (including my awesome salary of every penny that isn't spent somewhere else) we never realized an ultimate profit. You fell for the oldest trick in the BOOK! Never, never, never make deals based on Net Profit. Always go for Sales or Revenue - that way it's up to the company to control their other expenses and you get to go on your merry way.

Now, for those of you that think this scenario is a bit far-fetched... just ask David Prowse. He's the guy that played Darth Vader in Return of the Jedi. He signed a contract just like this - and because Return of the Jedi hasn't made any money yet (because of George Lucas's sweet salary), he hasn't been paid a dime. Doh!

Now, make me proud and go make some net profit!

The Misuse of Credit is what?

I just read an article in the Harvard Business Review on Debt that was very concise and well-written. (http://hbr.harvardbusiness.org/2009/07/selling-to-the-debt-averse-consumer/ar/1) It talked about the "monthly payer" - the person who doesn't care how much something costs, they just care what the monthly payments are going to be. This monthly payer is a big part of why the world is in such financial trouble (but don't think for a second that it's the only problem). Just when I thought the article was spot-on, I read the last sentance: "Misuse of consumer credit is gone for good."

Are you on crack?!

Ya, right. Do these people think before they write? Nothing is EVER gone for good. I don't care if it's finance, food, or romantic smoochie stuff - very few people learn from the past, and societies as a whole rarely if ever learn from the past. It's a group-think kind of thing.

The question is not IF we'll get into another financial meltdown - but WHEN, and whether or not you'll be prepared.

Don't be a Monthly Payer. Be a cash payer. Now THAT'S sound advice. http://providentliving.org/content/display/0,11666,7417-1-4006-1,00.html

Assets, Liabilities, and What?

OK - enough of the chit chat. It's time to talk about some cold, hard, assets, baby! That's right. We all love em - but few understand em. I decided to include Liabilities and Equity (Equi wha?) in this little round table discussion of ours, because let's face it - very few assets in life are EVER acquired without liabilities and equity attached. I'm thinkin the BEST way to explain Assets, Liabilities, and Equity would be to give a little example - something we're ALL really familiar with; buying a high-powered sniper rifle for those weekends when 4-wheeling just doesn't cut it. Oh, YA baby!

Let's say that you have your eye on this thing, and it's only $10,000. Problem? Not really, except you don't HAVE $10k and The Mrs. isn't about to let you cash in the 401k (more on those later). In all your brilliance you decide that Bob (the banker) would be sympathetic to your plight. You decide to approach him in all your humility and plead your case - because out of all people, Bob would understand. Bob IS sympathetic, but not to the tune of $10,000 sympathetic - more like $7,500 sympathetic. All is LOST! Oh, the humanity! You don't want to settle for that other "piece" the store has behind the counter - you want the one with the 4 ft. scope, and the cool tripod on the front. Just at the very moment when you're about to consign yourself to the trenches of misery (filled with guys who can't buy cool stuff), you realize that you saved 10% of your income ever since you were a child - and your savings Shoooould be right around $2,500 by now. Success! You're mom always told you to save - and NOW it's paying off! She's Brilliant! You TAKE the $7,500 unsecured, high interest rate loan from Bob (more on those later) and run home. You combine the two sacks of money (your $2,500 and the banks $7,500) and head off to the store. As you return home, you now have an aire of confidence, like a king entering his royal palace - for not many men in the kingdom can plink "stuff" from a mile away. Life never tasted SO good.

OK - let's take a look at where your finances are. You just bought a gun that cost $10,000 - THIS is your Asset. What's your liability? Why, the $7,500 of course. You still OWE that to the bank - that's pretty much the definition of a Liability - You're still LIABLE for it. So, now that we've established our Asset and Liability, what's our Equity? That's EASY, it's just the $2,500 we put down on the gun. Now let's say we find it in our heart to pay the bank back a little (because we're cool like that and we would NEVER want America to end up in a big huge recession) so we cut the bank a check for $500. Now we only owe $7,000 and our equity in the gun goes up to $3,000. The asset still stays at $10,000 - because that's what we bought it for.

Pretty Easy? I thought so. Now - go get that gun! Just invite me along when you start plinkin stuff.

Wha?!

Wha?! You hate accounting? If you're one of billions that think it was created as a substitute for waterboarding and somehow made its way into our public school system, this blog is for you. Ima gona make accounting and 'numbers' so cool to learn about that you'll actually become more popular just by following my posts. Before you know it, you'll be asking your friends what program they use to keep track of their loan amortizations. I can hardly wait!