Josh Aharonoff
May 25, 2023
Welcome to another exciting edition of Legit Numbers!
In this week's digest, we delve into the fundamentals of accounting, embark on a global journey of finance and accounting, and learn how to clculate the Break Even Point.
What we’ll be covering in this edition:
The ABCs of Accounting
Calculate Break Even Point
The World of Finance & Acccounting 🌎
Let's dive in...
Won’t you sing along with me?
A
Assets
Items of Economic Value that you own / substantially control
B
Balance sheet
Snapshot of the business showing the Assets, Liabilities, and Owners Equity
C
Cash flow
The total cash entering & leaving your bank account
D
Depreciation
The wear and tear on the fixed assets in our business
E
EBITDA
Earnings Before Interest Taxes Depreciation & Amortization
F
Financial statements
The Income Statement, Balance Sheet, and Cash Flows
G
GAAP
Generally Accepted Accounting Principles
H
Historical cost
The cost to acquire an asset
I
Income statement
Show’s you the income & expenses of your business, and various levels of profitability
J
Journal entries
Your Debits & Credits
K
KPIs
Key Performance Indicators
L
Liabilities
Obligations & amounts owed to creditors of the business
M
Matching principle
An accounting principle that requires you to match the timing of income with the timing of expenses
N
Net income
Revenue - COGS - Operating Expenses + Other Income - Other Expenses
O
Owners Equity
Amounts contributed by owners + prior earnings
P
Profit
What you earn after costs
Q
Quick ratio
(Current Assets - Inventory) / Current Liabilities
R
Revenue
Your income
S
Shareholders
The owners of the company
T
Taxes
Amounts owed to the government
U
Unearned revenue
The amount of revenue collected / due, but not yet earned
V
Valuation
How much a company is worth
W
Working capital
Current Assets - Current Liabilities
X
eXpenses
The costs associated with your business
Y
Yield
The return on an investment
Z
Zero-based budgeting
A method of budgeting where you start from 0 and justify every financial activity
PS: Download ⬇️ this poster in high resolution by clicking the image below
The Break Even point is a coveted destination for many companies
It’s where your revenue finally matches your costs, and profitability is on the horizon
For most companies, this can be the goal right from day 1
For startups, this can come much further down the line as they start to prepare for an exit
➡️ How do you calculate break even?
This is most commonly expressed using your Revenue, and comparing it to your Fixed Costs and Variable Costs
➡️ What are Fixed costs?
These are costs that don’t scale with each sale.
If you are operating a restaurant, a fixed cost may be the rent that you pay each month
➡️ What are Variable costs?
These are the opposite of fixed costs…
IE, they change in proportion to the level of business activity
Back to our example of operating a restaurant, a variable cost may be the cost of materials in the food you are selling
➡️ How do you calculate Break Even?
The formula is rather simple
Break Even Point=Fixed Cost / (Sales price - variable cost)
➡️ Can we go over an example?
🥪 Let’s say you sell sandwiches
🏬 Your rent is $10,000 / month
💰 You charge $10 / sandwich
💸 and your variable costs if $6 / sandwich
The formula would be $10,000 / ($10-$6)=2,500
That means when you sell 2,500 sandwiches…
You make $10,000 in profit…which is exactly what you need to break even on your fixed costs
🤑🤑🤑
Click the GIF below to get a copy of this template 👇
𝘸𝘩𝘦𝘳𝘦 𝘯𝘶𝘮𝘣𝘦𝘳𝘴 𝘢𝘭𝘪𝘨𝘯, 𝘢𝘯𝘥 𝘱𝘳𝘰𝘧𝘪𝘵𝘴 𝘴𝘩𝘪𝘯𝘦…
I wish I had this poster when I started my career in Finance & Accounting…
There is SO MUCH opportunity
Let’s dive into each area:
ACCOUNTING
Responsibilities include:
▪️ Producing financial statements, and managing financial operations
Roles:
▪️ Bookkeeper
▪️ AP / AR Clerk
▪️ Payroll specialist
▪️ Procurement specialist
▪️ Controller
Certifications & licenses:
▪️ Certified Public Accountant (CPA)
▪️ Certified Management Accountant (CMA)
▪️ Enrolled Agent (EA)
▪️ Graduate or Undergraduate Degree in Accounting
Common Terms:
▪️ Debits & Credits
▪️ Balance Sheet, Profit & Loss, Statement of Cash Flows
▪️ GAAP
▪️ Accrual
Common Tools:
▪️ Accounting Software
▪️ Enterprise Resource Planning (ERP)
▪️ Excel, PowerBI & Google Sheets
🌎 CORPORATE FINANCE
Responsibilities include:
▪️ Identifying investment opportunities and assisting with various financial objectives
Roles:
▪️ Investment Banker
▪️ Head of Mergers & Acquisitions
▪️ VP of Capital Markets
▪️ Valuations Analyst
Certifications & Licenses:
▪️ Chartered Financial Analyst (CFA)
▪️ Masters in Business Administration (MBA)
▪️ Undergraduate or Graduate Degree in Finance or Economics
▪️ Series 6
▪️ Series 7
Common terms:
▪️ Free Cash Flows
▪️ Internal Rate of Return
▪️ EBITDA
▪️ Stock price
▪️ Market Capitalization
Common Tools:
▪️ Bloomberg Terminal
▪️ Excel & Google Sheets
▪️ MATLAB
Any much much more!
⬇️ Click the image to download this poster in high resolution from my website to find the details on all other areas
And that wraps up another edition of Legit Numbers.
I hope you found this episode informative and insightful.
If you have any suggestions for future topics or would like to share your thoughts, please don't hesitate to reply to this email. Your feedback is valuable in helping me improve and provide you with more relevant content.
Until next week!