This module is a crash course in financial literacy. It's important to know your numbers for two reasons. First, to figure out if your idea is profitable and therefore worth your time to pursue. Second, to explain the revenue model, to potential investors or partners. >> Of the three standard financial statements. The income statement, the balance sheet, and the cashflow statement. The one that best articulates the profitability of the business over time, is the income statement. >> The income statement is sometimes also referred to as a profit and loss statement. This statement is usually a table where the columns will represent time, months, quarters or years. And the rows will represent different aspects of the business model. The first row, summarizes the forecast of gross revenues, from selling the product to the customers. The second row, then summarizes the expenses that are directly related to each unit produced. Like the cost of the sub-components or ingredients these are called the Cost of Goods Sold or COG's for short. The difference between the gross revenues and COG's is their gross profit margin. For example, if we sell $2,000 worth in smash bulbs and the ingredients to make them or COG's. Are $1,000, then the remaining gross profit margin is $1,000, or 50% of the gross revenues. But COG's are not your only cost. >> The next entire section of the income statement will summarize all the daily operating expenses of the business. Including salaries, marketing, office expenses, utilities or professional service providers. When you subtract all of these operating expenses from the gross profit, you get the net profit. And you might find out, that the net profit may be unattractive. For example, with a gross margin of only $1000, expenses for the salaries would wipe out the net profit and sink the business. >> If your business idea did generate snap profits, there's still more expenses to consider. Namely, taxes, interest, debt, and depreciation. These additional expenses can drive down the net income even further towards unprofitability. So, coming back to our example, the Smashbulb business, could hypothetically have no operating expenses. The website would be free, there are no marketing expenses. The bulbs could be sent to directly on demands from our supplier. We wouldn't draw salary. But even after taxes, the gross profits of $1000 might only result in an a net income of a couple of hundred dollars. And still not be worth the effort. >> When forecasting an income statement, it is important to remember, that the forecast are based on several assumptions. And will never be 100% accurate. They are none the less valuable. To get an idea of the economic feasibility of the business and to tell investors, how you hope to turn their money into more money. Now that we've covered the basic finances, we have two activities for you to do. First, to forecast your business income statement, including the revenues and expenses. And second, to test your assumptions about expenses by interacting with potential suppliers.