Accounting for my business

This is a post that talks about accounting for wealth.  It looks at the simple comparison of adding up assets each month to compare to the prior month as well as looking at how the sales made in the month generate the profits which generates the isk which is then reinvested into the market (i.e. shows the accounts for my business as you would see them in real life).

this is an accounting post, so move on if your nerd alert-o-meter is sounding the alarm.

in the next few days i will put up a post that discusses October in the traditional way.

Accounting for my wealth

During October, my wealth rose by 4.2bn isk to 7.2bn.  I am disappointed in that but that is the subject of the following post.

the simple method of looking at this 7.2bn is:

So, basic stuff much like a share or property portfolio would be compared. Cash + assets less some provisioning to estimate possible costs to liquidate the assets to cash.

But life gets more interesting if we want to see how did the 37.0bn of sales i made in October end up becoming an increase in wealth of 4.2bn (7.2-3.1 and a rounding error).

Lets look at the table below which is effectively the "Profit & Loss Account" for September and October.

(items in yellow are numbers i have inputted from data sources, the rest is calculated)

So, 37.0bn of sales became 9.9bn of of profits (i.e. i bought items from Jita for 27.1bn and sold them in Dodoxie for 37.0bn which gave me a total profit of 9.9bn isk and therefore was a margin of 26.6% (9.9/37.0).  That is inline with the 25% margin i target.

So far, so good.

But i then have to pay four sets of costs on all this - referring to the memo below:

1) Sales Tax: for the full month of October i was Level 4 in Accounting and therefore i pay 2.70% sales tax = 1.0bn isk (actually is it 2.75% but rounding errors . . . . . )

2) Broker Listing Fees: for the full month of October, my Broker Relations skills was Level 4 and so i paid 3.78% of the listing price as a fee = 1.4bn isk

3) Broker Price Change Fees: however, i know i paid the brokers 2.6bn isk in total and therefore 1.2bn (=3.11%) was the fee paid to change the prices of items for sale to keep them the lowest price

4) Courier Fees: and finally, i generally pay 2% of the sales price as a Courier Fee to get my items from Jita to Dodixie within an hour if i can.

In total, that brings my October margin down from 26.6% to 15.0% as these four costs came to 4.3bn isk.  So my profits after trading costs are 5.6bn in October (9.9 - 4.3) vs 4.5bn in September.

And then from this i pay 1.4bn to buy 500 Plex to keep the Omega account.

And therefore, my monthly profits which is the increase in my wealth comes to 4.2bn isk in October.

The Balance Sheet of my business is simple for now.  It is Cash + Items for sale less the provision which should equal (balance too) the sum of monthly profits to date:

Note that 'Retained Income' is the sum of all profits my business has ever made and so equals the prior month's retained income + this months profit.

But see how the 'Profit & Loss account' is merely the movement in the 'Balance Sheet' of September to October for my business, and see how the sum of the profits is split between Items for Sale and Cash.

The Cashflow Statement is also quite simple though we must remember that i seek to invest all my isk back into the market and therefore when i look at the cash i have left over at the end of each month it is basically none.

But for the really nerdy here, the cashflow statement is interesting to see how it is generated:

The first part of any cashflow statement is to take the Trading Profits in the Profit & Loss account and adjust for all 'non-cash' items.  i.e. Profits are not Cash but over time they add up to be the same.

So, looking at October, the 5.6bn isk trading profits are reduced by 5.2bn to reflect the increase in stock (=items for sale).  Lets think about that for a second.  At the end of September i had 3.7bn of Sell Orders on the market (see the top of this post) and at the end of October i now have 8.9bn of Sell Orders on the market.

So, in isk terms i increased my investment in the market by 8.9-3.7 = 5.2bn isk.  In other words, i sucked up an additional 5.2bn of isk that the trading profits generated.

Now, i also take a provision against these sales as an estimate of worst case cost to make the sales complete.  This is a non-cash item that reduces accounting profits but does not change the cash position, so we need to reverse it out.  The increase in the provision from September was 1.0-0.7 = 0.3bn isk and so we add that back (i.e. trading profits were lowered by 0.3bn isk but the cash generated was not changed by this accounting entry).

What that means is that the 5.6bn of trading profits actually generated 1.4bn isk of cash because the rest was invested back into the market into Sell Orders with a small adjustment for an increase in provisioning.

This 1.4bn isk generated was spent on Plex to continue the Omega and so once all is said and done, i did not generate any surplus isk on October and ended up with the 0.1bn isk i started with!

. . . . . . and that is the nature of high growth companies that need to spend alot to continue their growth.  All their surplus cash is reinvested back into the business.  It looks like they are not generating any cash but in fact once they stop growing the cash generation is fantastic!