I haven’t posted in a while because I feel like in the absence of news we just start talking in circles.
However I do still read, and keep up-to-date with goings on.
For a while I’ve been noticing that there seems to be a lot of misunderstanding about financial statements. I understand why many wouldn’t take much notice back in the day when AHZ was valued on sheer excitement and potential, but now that we’re right on the edge of a major shift into revenue growth, positive cashflow, and dare I say it… profitability, I think it extremely important that investors have an understanding of the numbers, so they can value their company correctly. To that end I thought I might be able to post a “quick guide” so that any one who is interested can get more value from company financial statements:
Cash v’s Accrual accounting: In accounting there are two methods to report on revenue (sales). I’ll largely ignore the expenses side for the purpose of this exercise.
Cash Accounting: When a sale is made, the cash from the sale is collected (think coffee shop).
When an expense is incurred, cash is paid out. At the end of the month the coffee shop has made $20,000 worth of sales, and received $20,000 in cash (payments, or “receipts”).
Accruals: A sale (revenue) is made at the time the customer accepts a liability to pay for the goods or service – the payment may not actually be collected until a later stage. Likewise, a purchase (expense) may be made, but due to the payment terms extended by the supplier, payment may not need to be made for 30, 60 or 90 days.
So how does accrual accounting work in practice?
AHZ makes a sale to a new Adapt customer for $200,000 in May. Customers expect payment terms, so AHZ says, no probs, you can have net 30 day payment terms – payment isn’t due till 30th of June.
AHZ records the following transactional information in May. Lets pretend May is the 1st ever month of sales.
Sales (Revenue): $200,000 Appears on profit and loss statement at FY & HY
*Cost of goods sold (COGS) $50,000 Appears on profit and loss statement at FY & HY
Cash $0.00 Appears on Cashflow statement at 4C, FY & HY
Receivables: $200,000 Appears on balance sheet at FY & HY (customers liability to pay)
*assumes 75% Adapt margins.
So if we got a 4C statement just for May, the top line would say ‘Receipts from Customer’ - $0.00, but No doubt in the accompanying commentary, Wayne or Mark Zirssen would report May sales of $200,000.
Then we roll over into June. AHZ is doing well, and has made another $200,000 sale to the same customer, plus made an extra $150,000 sale to a new customer who is also on 30 day payment terms (not due till end of July)
June Sales: $350,000 Appears on profit and loss statement at FY & HY
* COGS: $87,500 Appears on profit and loss statement at FY & HY
^Cash $200,000 Appears on Cashflow statement at 4C, FY & HY
Receivables $350,000 Appears on balance sheet at FY & HY (customers liability to pay)
^Mark Zirsen had the account receivable team on the phone to the May customer asking them to pay their bills, and collected the $200,000 they are owed.
EOFY Passes, and then the company releases a financial statement containing: Profit & Loss Statement, Cashflow Statement, and Balance Sheet (Assets and Liabilities).
P&L Statement (pertinent snippet)
Revenue: $550,000
C.O.G.S: $137500
Gross Profit: $412,500
Cashflow statement: (pertinent snippet)
Receipts from customers: $200,000
Balance Sheet (pertinent snippet)
Assets:
Cash: Whatever our cash balance is at the time
Trade and other receivables: $350,000
The exact same delays occur between incurring a liability to pay for our purchases, and when we actually pay for them. Our current liability to pay for stuff can be found on the balance sheet under liabilities – ‘Trade and Other Payables’.
For the upcoming 4C, our cash collections (receipts from customers) will be relatively low. This is because last quarters sales were relatively low @ $4.8M. I am however expecting decent revenue growth, so receipts in the following quarter are likely to be stronger.
It might be standard stuff for some, but I hope that it has been useful for those who aren’t as well versed in company financials and accounting. It is going to become very important for tracking our company's true progress. (not the progress that the SP suggests). I have spent a great deal of time with the company's financial statements, and the changes over the last 6 months in particular have been nothing short of amazing. I for one am extremely excited about the next 12 months (and not the over-exuberant excitement that revs the market up before the company even makes their first dollar - excitement based on the sound underlying progress of the company that is there for all to see in the financial statements)
Best of luck to all.
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