Financials

"Send us your financials"

• Profit and lossMoney earned and spent over a period, like a month or a year. Also called the income statement.
• Balance sheetWhat the company owns and owes on one exact date.
• Cash flow statementMoney that actually came into and left the bank over a period.

Any investor or buyer will ask for the studio's financial statements: standard reports that show how the money works. Every company uses the same three.

The profit and loss statement

The profit and loss statement (P&L) starts with revenue: all the money earned from sales and ads. Then it lists expenses: everything the studio spent to run, like servers and tools.

Revenue minus expenses is profit. If expenses are bigger, the result is a loss.

That's why revenue and profit are not the same. A studio with $100,000 of revenue and $120,000 of expenses sounds big, but it lost $20,000.

The balance sheet

The balance sheet is a snapshot on one date. It has three parts:

• Assets: what the company owns, like cash in the bank, money the stores still owe us and our laptops.
• Liabilities: what it owes, like a loan or an unpaid bill.
• Equity: what is left for the owners after paying everything owed.

It always balances: assets = liabilities + equity. With $40,000 of assets and $10,000 of liabilities, equity is $30,000.

Cash flow, burn and runway

Profit is not the same as cash. Stores often pay weeks after a sale, so a studio can be profitable on paper and still have an empty bank account. The cash flow statement shows the real money in and out.

Young companies watch two cash numbers. Burn rate is how much more cash goes out than comes in each month. Runway is how long the cash lasts: cash divided by burn. If we spend $5,000 a month more than we earn and have $30,000, we have 6 months of runway.

Margins: what we keep from each dollar

Investors don't just ask how much profit we made. They ask what share of revenue became profit. That is the profit margin: profit / revenue x 100.

Made-up example: in March the studio earned $5,000 and made $2,200 of profit. $2,200 / $5,000 = 44%, so it kept 44 cents of every dollar.

Margins let you compare different months, and studios of different sizes. Watch out for store fees: stores usually keep 15% to 30% of each sale, so always check whether a report shows revenue before or after the store's cut.

Numbers tell the story

Together, the three statements tell an investor or buyer the honest story of a studio: is it profitable (profit and loss), what does it own and owe (balance sheet), and how long can it keep going (cash flow)?

A separate business bank account, with every dollar in and out tracked (Stage 6), is what makes these reports quick and trustworthy. Many studios pay an accountant to prepare them properly, and the rules for company accounts and taxes differ by country.

Bolt says: These numbers are the raw material for the big question every buyer asks. Next lesson: how studios are valued.