Whoever Made This Meme About Coffee Shops May Have Never Seen (or PURPOSELY IGNORNING) Income Statements and Financial Statements

The Facebook group "Stop Blaming Capitalism for Socialism's Failures" is now plagued with Anonymous Participant posts. It's probably because they could no longer defend themselves. Anyway, let's think of the fallacy of this thinking. I'd like to point out that people get rich from the net profit--not from the sales. People should stop confusing sales for profits!

Business & Plans

If we look at that sample income statement, we look at how the coffee shop operates. Let's use the USD currency over the PHP, even if I'm a Filipino. The reason is that the sample income statement is from an American website. If we look at the income statement--we have sales deducted from the Cost of Goods Sold (COGS), and every other expenses. SG&A means selling, general, and administrative expenses--which involves paying the coffee growers, the coffee refiners, the coffee packers, and the coffee brewers. The person who runs the coffee shop is involved in the chain. The supplier of the coffee must also pay the coffee growers and coffee refiners. In short, we've got a supply chain going on.

If we look at the Earnings Before Interest and Taxes (EBIT)-- we also look at the interest expense. People borrow huge amounts of money, therefore, they need to pay interest rates. If a company had a financial bond from the money market--interest rates have to paid every quarter. After all, the person had to part away with that money and paying interest is necessary. The full amount must be returned within the specified period. If I invested in a bond for SM or Aboitiz--the respective company must pay me interest as agreed. 

Now, we move to the sample financial statement of the same sample coffee shop:

Business & Plans

If one's confused about the difference between accounting and finance, I often get lost too, even after getting an MBA. Here's an explanation from the website where I got the charts:

First, let us explain the difference between cash and income as many people tend to confound both. The main difference between a cash-flow and an income is timing. To understand the nuance, let’s take a general example from the consulting industry: Suppose you sent an invoice of 1,000 USD, dated March 15th, to your client after completing a consulting project. Your client receives the invoice and then calls you to confirm he will pay his dues during the first week of April. Comes April, you check your bank account, and you notice indeed a wire transfer of 1,000 USD dated April 5th.

So, what did actually happen? Accounting wise, you should record 1,000 USD as a revenue for the month of March in your income statement, while you should record 1,000 USD as a cash inflow for the month of April in your cash flow statement. This means that cash flows do not necessarily follow the same recording date of income and payments. Income and expenses usually follow the invoice date while cash inflows and outflows follow the actual clearing or payment date.

So what is the cash flow statement comprised of?

It is simply the summary of three types of cash flow movements over a certain period of time:

The cash flows from operating activities: Here, cash inflows are money collected from customer orders and cash outflows are payments made to pay for COGS, raw materials and external suppliers.

The cash flows from investing activities: Here, cash inflows are money collected from the sale of a certain asset or capex item (such as an old espresso machine) and cash outflows are money paid to acquire new assets (such as a new espresso machine).

The cash flows from financing activities: Here, cash inflows are new funding received from business loans or equity investors and cash outflows are payments made to partners in the form of dividends for example.

Investors focus a lot on the ability of a business to generate solid and tangible cash flows which means that it is not enough to have a profitable coffee shop, what’s even more important is to grow an F&B venture that generates consistent and significant cash flows.

If you use our Coffee Shop Financial plan in Excel included in our premium Coffee Shop Business Plan package, you will be able to automatically generate a detailed cashflow statement after updating your cost and revenue assumptions.

If we think about it, the higher-ups or the owner of the coffee shop is burdened with taking care of the money. The three areas of operations, investments, and financing activities. It's because businesses will need to manage their revenues. Revenues will be used to pay for stuff like the COGS, raw materials, and suppliers--which includes the workers' salaries. The investing activities may go from a garage sale or investing some money not needed for the moment. FInancing activities would also involve getting loans and for some, paying dividends to every stockholder. Employees who have the stockholder option should also be paid dividends.

If there are no solid and tangle cash flows--what will be used to pay the employee? If the employees aren't well-paid and well-maintained--how can the operations go on? The working class is an important component. However, they also need someone to guide them properly. Employees who are given proper treatment, will in turn, make the company profitable and sustainable. Employees who are ill-treated may make the company profitable but not sustainable. What's profitable today may no longer be profitable tomorrow. However, sustainability results in long-term profitability. It's like it can be profitable to invest in cryptocurrency in the short run but not in the long run. It's more profitable to invest in stocks and bonds as a long-term investment--even if there may be short-term losses.