Friday, January 30, 2015

100 Billion: Balance Sheet and Income Statement

At the end of my last post I mentioned that the next step in the 100 Billion project was to produce a balance sheet and income statement.  I've created these sheets for the 100 Billion corporation (not its real name).  In this entry, I'll discuss what we'll use these sheets for and what we know so far about the effort to hit 100 billion ISK.  At the end of the post, I'll describe how I built these sheets and provide links if you want to use them for your own purposes.

Balance and Income for the 100 Billion Corporation

A balance sheet is a snapshot of a company's financial condition, usually on a specific date.  A traditional balance sheet has three sections:
  1. Assets, usually listed in order of liquidity (that is, how easy it is to convert the asset to cash)
  2. Liabilities (debt or things we owe other people)
  3. Ownership equity, which is almost always assets minus liabilities.  This is the net worth of the company.
Because of the relationship between assets, liabilities and equity, a traditional balance sheet will presents assets on the left side of the sheet, and liabilities and equity on the right, with the two sides balancing.  I've created a traditional balance sheet for the 100 Billion corporation.

An income statement shows a company's revenues and expenses for a given time period.  Typically, revenue and expenses are summarized according to one or more categories.  When done well, an income statement shows exactly how a company makes its money by showing which activities produce the most revenue, and which activities are the most expensive to pursue.  It goes without saying that when revenue exceeds expenses, the company makes money.

With those preliminaries out of the way, let's take a look at the current balance sheet and income statement for the 100 Billion corporation.  Note that for accounting purposes, I'm declaring 2015-01-01 as the official start date of the project.  So all accounting records will be referenced to that date.

Balance Sheet

As I mentioned in the previous post, the 100 Billion corporation is starting off with assets and cash from when it was the 10 Billion corporation.  So the company already has a healthy cash balance of around ISK 11 Billion.  Since all the members of the corporation are solely dedicated to its activities, we're also including the cash balances of those characters.  This puts the cash assets for the corporation at around ISK 12 Billion.

The next section in "Assets" lists equipment which is literally the EVE assets of the corporation and all its members.  Once again, we're combining the assets of the corporation and its members.  This is because a substantial part of the value of the company is the ships the company has purchased for use by its members.  The value of equipment here is simply the EVE Market Data price (in Jita) of the asset on the day the report is generated.  Equipment value is substantially higher than I expected, indicating that more than half the gross value of the company is stored in equipment.  That's actually a good thing, but more on that in a bit.

On the liabilities side of the sheet, the main liability is the PLEX cost of maintaining all the accounts used for the corporation.  We compute this cost by computing the current PLEX cost in JITA at the start of each month and multiplying by the number of accounts.  The company is less than a month old, so we've only had to (virtually) buy three PLEXs so far.

The last part of the liabilities section is owner equity which is just assets minus PLEX cost.  This is the net value of the company.  Our goal is to get this value to 100 billion ISK.

What does the balance sheet tell us so far?  Some observations:
  • We have a healthy cash balance, but probably too much.  There's no reliable way to generate interest on cash balances in EVE so this money isn't working for us.  We need to figure out our monthly operating costs so that we can reduce this balance down to just enough to let us conduct business.
  • We have a lot of value in corporation equipment, but it's not clear how much of this is liquid (things we plan to sell as part of the business) and how much of this is fixed assets or investments (things we'll never sell or things we'll sell as an investment later on).  It's probably worth breaking this down into liquid, fixed and investment assets.
  • It looks like we're already a quarter of the way to our goal, but the reality is that PLEX costs are going to eat us alive if we can't find a way to generate significant income.  Each account will have to generate ISK 800 million per month just to break even.
A lot of the net value of the company is in equipment, so let's take a look at the top 20 contributors to asset value:

Interestingly enough, the first ISK 6.5 billion in asset value is from gifts and promotions.  I'd forgotten I even had these. There are a few other promotional items further down the list as well.  These all look like investments to me and should be categorized and tracked as such.  The next two big items are ships assigned to staff.  In a traditional balance sheet, these would be called fixed assets.  That is, things which will be used for a long time by the company and likely not converted to cash unless the survival of the company depends on it.  The remaining items would likely be classified as "inventory".  That is, things we plan to sell as part of business operations.  For next time, we'll use EveKit to categorize these assets for better tracking.

Income Statement

Let's turn now to the income statement.  We're close enough to the end of January that I think it's safe to call this our income statement for the first month of the company:

The left side of the table shows all income for the corporation and any staff as pulled from the journal log for the current month.  The right side shows all expenses for staff and the corporation.  The summary at the top shows the net income, which is just total income minus total expenses.

What does the income statement tell us about the company so far?
  • First off, we lost money this month.  We operated at a deficit of ISK 900 million.  Ouch.
  • Cash transfers solely within the corporation appear on both sides of the sheet.  Everything balances out, but we should remove these transactions in the future to get a clearer picture of company operations.
  • The company currently makes most of its money selling stuff in the market.  Almost ISK 1 billion was made this way.
  • The next biggest income source was mission running, at about ISK 100 million.
  • The largest expense in the company is buying things from the market.  That certainly warrants some investigation!
  • Planetary export and import taxes are another big expense.
The punch line is the company lost money this month because we either bought too much or bought some expensive things from the market.  Let's take a look at the top 20 transactions on both the income and expense side:

On the income side, we made most of our money selling various tech II ship equipment (and apparently a spare Tengu propulsion unit we had lying around).  On the expense side, we decided to buy a Tengu for mission running and this took a nice bite out of our profit for the month.  Ignoring the Tengu purchase, most of the expenses were used to support invention and production of tech II space equipment.  And now the bad news: taking the Tengu out of the picture, we still would have lost money for the month (although substantially less).  That's not good.

We'll need to break out the spreadsheets to get a handle on what's profitable and what's not.  We'll leave that for next time.

Takeaways and Conclusion

The 100 Billion corp is off and running and we have a few basic tools to get a handle on operations and income.  Here's what we need to do before next month's balance and income statement:
  • We'll reclassify assets as either investments, fixed assets or inventory.  We'll also add some tools to start tracking investment value over time.  As investments appreciate (or depreciate) we can add these values to the income statement. 
  • For the tech II items we're selling in the market, we'll need to start tracking production costs against market value so that we can estimate what is profitable (and what isn't) and what our margins will be.
That's it for this month.

Appendix: How It's Made

All tools created for the 100 Billion project will be stored in this Google Drive folder.

The balance sheet and income statement I used for this entry come from a Google Docs Spreadsheet which pulls data from EveKit and EVE Market Data.  I've shared the spreadsheet here (there are usage instructions on the spreadsheet).  You'll need three things to make this spreadsheet work:
  1. An EVE Market Data character name.
  2. Your SDE key from EveKit which you can find here.
  3. One or more EveKit sync account keys.  You can create these keys from the account list here (select "Access Keys" for the appropriate accounts on the right).
All of this information is entered on the "Accounts" sheet in the workbook. This spreadsheet will work for any combination of corporate and character accounts as long as the provided access keys can access assets, the wallet journal, and wallet transactions.  When you have everything configured, select either "Update Balance Sheet" or "Update Income Statement" from the "100 Billion" dropdown menu.  

The sheets included in the workbook are as follows:
  • Balance Sheet - balance sheet for configured accounts computed as of the current date.
  • Income Statement - income statement for the date range specified at the top of the sheet.
  • Transaction Summary - sorted transaction summary for the income statement.
  • Asset Values - sorted asset valuation using current prices from EVE Market Data.
  • PLEX prices - average PLEX price at the start of each month.
  • Accounts - EveKit access key configuration.

Most of the hard work is done in a Google Application Script which you can view by selecting Tools ➞ Script editor...


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