The Lemonade Stand

Let's say we're 10 years old and want to run a lemonade stand on a sunny Saturday afternoon.

We don't have any money, so we borrow $15 from Mom for lemons, sweetener and cups. Our supplies cost $10. We have a good day and sell 30 cups at $1 each, with nothing left over.

How do we record what happened with our little business?

Look 1: Sales

Pretty straightforward. We made $30, spent $10, and kept a profit of $20. Not a bad start to our burgeoning citrus empire.

But this doesn't tell us about the money we borrowed from Mom. There's no place to put a loan alongside our sales results. So we need another look.

Look 2: Cash

Before we talked to Mom, we had lemonade empire dreams and no money. Yikes! Then we pitched Mom on our revolutionarily disruptive idea. Here is every dollar that came in or went out during the day:

See how our cash is different from our profit? We spent $10 of Mom's money on supplies, and our $30 of sales paid that back and then some. Profit is $20, but the cash box holds $35, because $15 of it is Mom's. The loan doesn't belong in Sales, but it does belong in Cash.

But what about paying Mom back? Nothing shows that yet. So let's take a third look and call it Stuff: the stuff we have and the stuff we need to do.

Look 3: Stuff

We used up all our lemons and supplies, so the only thing the business owns is the $35 of cash. But the business also owes Mom $15. And because we treat the business as separate from us, the owners, the $20 left over is money the business owes to us. Think of it as what the business is worth after paying everyone else.

Notice how what the company Owns equals what the company Owes. That's always the case, because what it owes the owners is simply what's left after paying everyone else. If the company owes more than it has, what it owes the owners is a negative amount.

The Same Three Looks, in Work Clothes

There's nothing magical about a Profit and Loss, a Cash Flow Statement and a Balance Sheet. They are three different lenses for looking at any company or nonprofit.

When I move to a new city, I don't really get the geography until I walk around. Financial statements are the same: until you build them from scratch and break them down to their simplest forms, they're hard to really understand. I've walked thousands of people through the Lemonade Stand, and I hope it clears things up for you too.