Today we’re going to be talking about Money. And Profit.

You’ll remember from the business models class that everything on the left side of the Business Model Canvas—the team, the assets, the work that the team does—is associated with costs.

And everything on the right side—the customers, the relationships with those customers and the channels for reaching them—is associated with revenue or income.

The difference between that revenue or income and the costs are the business’ profit.

But managing money in a business is not quite as simple as “money in, money out” way that you’d balance your personal checkbook.

In the world of business, the art of money management – is called Financial Accounting.

Over hundreds, or even thousands of years, people working in business have developed a number of sophisticated ways of measuring a business’ financial performance over time.

Finance is always about those two things: Money and Time.  

And there are many ways that business measure both money and time

That can be a range of time—a day, month, quarter or year…or a moment in time.

Ok so there are few things to know.

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There are 3 main financial statements that businesses use to measure and report on their financial health.

Each of these is a different way of measuring the flows of money through the business over time.

It’s like looking at the same picture but from different angles.

In this class we’re going to quickly review all 3 types of financial statements to get a sense of what each one does.

Then we’ll spend a little bit more time going deeper on how businesses measure profit.

First you have the Income Statement

Which measures profits and losses.

How much money a business is making or losing and when and how the business is making or losing it?

Next you have the Balance Sheet

Which measures the company’s assets and liabilities

How much does the company own and how much does it owe?

And finally you have the Cash Flow Statement—what does exactly what it sounds like….

It measures how much cash is going into the business, out of the business and held by the business.

Ok that’s kind of a lot of information.

There is so much more we could learn about each and why it works the way it does

For now, I just wanted to give you some context.

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Today we’re only looking at one of these—the Income Statement.

Which measures profits and losses.

You’ll also hear it referred to as a Profit and Loss statement or a P&L or an Earnings Statement. They’re all the same thing.

We are going to go through a simplified version – that will help you understand the logic of how profit is measured.

It will be enough though that by the end of this class you’ll be able to read and understand any Income Statement.

We said earlier that financial statements always measure money and time

The income statement—and any financial statement--is always for a certain period of time.

It might be the last month, the last year, or the year to date.

You always have to check to see what period of time is being covered.

Total revenue is all of the income that your business brings in.

So that’s going to be all of the stuff you sell multiplied by the price you get for it.

If you sell 100 widgets at $10 each, your revenue will be $1000.

Cost of goods and services (people sometimes say “COGS”) are the expenses that are tied directly to making whatever it is that you sell.

That could be the raw materials you needed, the cost of labor, the packaging used, shipping and transportation costs...

Basically anything that was directly tied to creating and delivering the products or services you sold.  

Gross profit is the difference between your revenues and your cost of goods and services.

It helps to measure how profitable your products and services are. So Gross Profit is one kind of profit.

And then we have another category of expenses:

Operating expenses are the cost of "keeping the lights on" in your business.

They include things like rent, electricity, marketing expenses, and the wages paid to the people managing the company, and so on.

Operating profit is the difference between Gross Profit and Operating Expenses.

It tells you how much money you made once you factor in the cost of running the business, including capital expenses that you are spreading out over time.

Net profit is what’s left after the company has paid taxes and any interest on debt.

This is the so-called "bottom line", the profit you actually get to keep.

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Let’s take a look at a couple of real examples that will give you a better sense of how this works in practice—and why the P&L is set up how it is:

I’ve picked these two companies because they are huge and well-known, but also because they will demonstrate important differences in income for different kinds of businesses.

The first is Walmart.

A mega retailer founded in the early 1960s. Walmart has 10,660 stores in 24 countries and a little less than half those in the (4,606) in the United States.

Walmart in 2024

Revenue         $681B

Biggest company in the world measured by revenue…

More than the Gross Domestic Product of Belgium or Argentina

COGS         $512B

Gross Profit        $169B

Operating expenses $140

Operating profit          $29B

Other expenses          $10B

Net Profit          $19B

Margin                  2.8%

For every dollar of revenue made 3 cents

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Next we’ve got Google…

Well technically Alphabet which is the holding company that includes Google as well as other subsidiaries such as YouTube, Waze, Fitbit, and Android.

Google was founded in 1998 and it is one of the most profitable companies of its size.

Alphabet (GOOGL) in 2024

Revenue $350B

COGS         $146B

Gross Profit   $204B

Op Expense $91B

Op Profit $112B

Other expenses $12 B

Net Profit $100B

Margin                 29%

For every dollar of revenue Alphabet keeps 29 cents

Walmart—world’s biggest company by revenue—almost 2x as much revenue as Google

But Google made 100B vs Walmart’s 19B 5x as much income

And 10x as profitable – keeping approximately 30c for every dollar of revenue v Walmart’s 3c

Now of course there are some nuances in here that we didn’t get to.

But this is the basic structure that every business in the world uses to measure profits and losses in a give period of time.

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So that was a very quick tour of some of the basics of how profit is measured and of  finance.

There are a lot of nuances that we didn’t get into.

But this is the basic structure that business use to measure profits or losses in a given period of time.

And so now using that structure you can go online and you can look up any publicly traded company—private companies don’t share how much money they are making or losing.

There’s Finance is the way that companies measure money over time

There are many different ways of measuring both money and time –

Each of the 3 main financial statements does this differently

Profit is measure by the Income Statement or P+L which breaks down different types of expenses into categories so that you can measure different kinds of profit

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