Josh Aharonoff
Aug 10, 2023
Welcome another edition of Legit Numbers!
This week, we're turning Finance & Accounting into a Monopoly game, exploring Debt vs Equity funding options, and delving into the world of Inventory & Accounting.
What we’ll be covering in this edition:
Monopoly of Finance & Accounting 🎲
Debt vs Equity
Learn about Inventory & Accounting
Let's dive in...
I had way too much fun putting this one together 😂
If you grew up like I did…
Monopoly was a staple board game in your house.
I must have played 100s of games of Monopoly in my lifetime…
sometimes winning…
many times losing.
Today, I’m proud to release the very first Finance & Accounting edition of Monopoly for you to play with your family!
Here’s what’s included:
➡️ Collect $200 in Stock Dividends when you pass go
A stock dividends is an amount of retained earnings that a company provides to it’s stakeholders.
Make your way around the board, and collect your dividends!
➡️ Tax Refunds
Land on tax refunds, and today is your day!
Collect ERTC credits from the government, and spend that cash wisely!
➡️ Pause your Career and go back to school
Sometimes, we choose a path in our careers only to realize that it is not the right path to us.
A common approach is to go back to school, and get a new degree.
But if you majored in Accounting, you may be able to skip that, and get experience in a new field in the exciting world of Finance & Accounting
➡️ Study for the CPA Exam
OK…it’s not as bad as jail…
but for some of us, it’s just as bad 😂
When studying for the CPA exam, do not pass go, and do not spend time with friends & family…
the CPA exam is your only focus!
➡️ Pick up a ❓ for a tax notice
Some tax notices are good (tax refunds & credits)…
Some are BAD (you owe back taxes & penalties).
When you see a letter from the IRS...hope for the best!
➡️ Pick up an excel card
Untangle a circular reference
Build a solid dashboard...
Link your financial statements...
The sky is the limit with Excel!
➡️ Build a house or a hotel on 8 different property lines
The property lines are:
• The Statement of Cash Flows
• The World of Accounting
• The Balance Sheet
• FP&A
• Capex
• Tax Statements
• Adjusting Journal Entries
• The Financial Statements
➡️ Collect all 4 railroads to master the P&L
Take a railroad to any of these sections of the P&L
• Revenue
• COGS
• Opex
• Net Income
Collect all for a monopoly!
PS: Feel free to reply to this email if you'd like to be added to the waitlist to get a copy of this game!
Both can fund your business
But each mean something completely different from the other
Let’s start with some definitions…
➡️ What does it mean to raise Debt?
Raising debt means you received money with the expectation that you will pay back the amount, almost often with interest
It is a liability (since it’s something you owe to a creditor)
and is CAPPED…that is, there is an exact amount that you owe
➡️ What does it mean to raise Equity?
Raising equity is when you receive money, but this time in exchange for ownership in your company
This means that you have a type of liability to the new owner, but this time it’s UNCAPPED…as it involves giving a share of the profit & loss / sale of the company away
This would show up in the Owner’s Equity section of your balance sheet
➡️ What are the Pros & Cons of raising debt?
Raising debt can be a great way to inject capital into your business if you are comfortable with repaying the amounts with interest
Business owners who are bullish on the future of their business may have no problem raising debt, since they feel confident they will be able to use that capital to generate an even stronger return than what they will pay in interest
The cost of the interest + the schedule in which you agree to repay the loan however may catch up with you, leaving you in a difficult position if things don’t go as planned
➡️ What are the Pros and Cons of raising equity?
Raising equity can often times be a great way to raise capital without having to repay the amounts…let alone the lack of interest payments
Often times an equity owner will also be a proud contributor to the management of the company, yielding the company both with capital as well as expertise
It can come at a steep cost however, as you no longer have as big of a pie to share in the profits
Equity owners may also get voting rights, ultimately controlling the direction of the company, which can cause problems if you are not aligned
➡️ When should you raise debt, and when should you raise equity?
While every business is subjective, my 2 cents are:
Raise debt when you feel confident that you have a proven formula for generating a large ROI with the capital, and the interest is low
Raise equity when you feel there is a fair valuation for the company, and you are aligned with the person who wants to become an equity holder in your business
➡️ What Inventory means → goods that will be converted into finished products to be sold to consumers
➡️ Where it shows up → on the current assets section of the balance sheet
➡️ Valuation methods → these methods show you how you can value your inventory as it converts to COGS
1️⃣ FIFO - First In First Out
Treats the cost of the inventory sold based off of the price of the oldest inventory purchased
2️⃣ LIFO - Last In First Out
Treats the cost of inventory sold based off of the price of the most recent inventory purchases
3️⃣ Avg cost
Treats the cost of inventory based off of the average price of all inventory purchases
4️⃣ Specific identification
Treats the cost of inventory sold based off of the exact cost used when purchasing
➡️ Inventory components - inventory is often classified via one of these 3 buckets
1️⃣ Raw materials - goods purchased that will eventually be assembled into finished goods
2️⃣ Work in process - goods that have begun assembly but not yet completed as a finished good
3️⃣ Finished goods - goods assembled and ready to sell to consumers
➡️Formula
Beginning inventory
+ new purchases
- COGS
= ending inventory
➡️ Journal entries
1️⃣ When purchasing inventory → DR Inventory, CR cash
2️⃣ When converting inventory to COGS → DR cost of goods sold, CR finished goods
➡️ Related accounts
▪️ Cost of goods sold - the costs to deliver your product or service
▪️ Freight in / inbound freight - the shipping costs associated with receiving your inventory
▪️ Freight out / outbound freight - the shipping costs associated with shipping your inventory to the customer
▪️ Inventory spoilage - the cost of inventory that has been damaged or destroyed and cannot be sold to customers
▪️ FOB shipping point - buyer takes ownership and responsibility for the goods at the point of shipment
▪️ FOB destination - seller retains ownership and responsibility for the goods until they reach the buyer
▪️ Goods on consignment - Ownership remains with the seller until the buyer sells or uses the goods.
➡️ Benefits
👍 Easier to protect via a patent
👍 Can be used as collateral on a loan
👍 Variety of sales channels: ecommerce, physical stores, retail, wholesale
➡️ Challenges
😕 Can be difficult to reconcile
😕 Can lead to spoilage
😕 Can lead to working capital constraints
😕 Margins can be low
That’s my take on inventory - what would you add?
I hope you gained valuable insights into EBITDA, Month End Close processes, and Revenue Forecasting with this week's edition of Legit Numbers!
If you have any questions or need further assistance, feel free to reach out. I reply to all my emails personally :)
Till next Thursday!