So here’s a continuation of the discussion about numbers, the chart of accounts and the second part of those “all-so-crucial” financials….
Now there are Income and Expenses. These items are part of the Income Statement or what is often referred to as a Profit and Loss Statement. The income bucket gets filled by the water spigot. The water in the income bucket should be used to pour into the expenses buckets….These buckets will be emptied at the end of the month.
Some of these buckets are more important than others. For example, food cost. This is also known by accountants as Cost of Goods Sold or COGS for short. These are special expenses because, without these, you have nothing to sell. And you guessed it, you want only a small amount of water going in here as possible…ideally somewhere around 30%. Because this water gets dumped at the end of the month. The next bucket that the water goes into…Labor. Here you ultimately want only around 25%. The remaining expenses….I call these Operating Expenses. All the water in all the expenses buckets gets dumped at the end of the month.
At the end of the day (figuratively speaking) you want about 10% profit at the very bottom of your P&L, in the bucket labeled Retained Earnings and you will be well off. (at least in the food business)..Retained Earnings accumulate in the bucket and at the end of the year flow onto the Balance Sheet as an equity item. If it is negative, it is reducing your equity. If it is increasing it builds equity and value in your business.
So here is the scaffolding for the accounting system. I hope I’ve managed to make it a bit easier to understand. Please post below if you like this, if it makes sense, or if something is confusing.