Online casino accounting: Financial statements with examples

Like any other business, online casinos and sportsbooks need to track their performance. Which financial statements do they need, and what do those statements contain? Keep reading for a full introduction to accounting for the gaming industry and the financial statements your betting or gaming business needs.

At first glance, casino financial statements look like the worst day of your least favorite math class — columns of numbers and a list of mystifying terms. It’s easy to get overwhelmed; what’s the difference between cash flow and income, or depreciation and amortization? Do you recognize expenses when you receive the bill or when you actually pay them?

This article about accounting for the gaming industry will lay out the most common financial statements, what kind of information is recorded on each one, and three main methods of analyzing casino financial statements — vertical, horizontal, and ratio analysis.

Which financial statements do online casinos need?

There are 3 main types of financial statements. They each offer their own perspective on your business’ performance, and are often analyzed in tandem to yield in-depth analysis:

1. Balance sheet
2. Income statement
3. Cash flow statement

A balance sheet assesses your casino business’s overall financial situation by summing up your assets, liabilities, and equity on a given day. An income statement charts overall revenue and expenses over a period of time, while a cash flow statement details every time liquid cash moves into or out of your business during a set time period.

Balance Sheet with example

Balance sheets, also commonly referred to as a statement of financial position, are essential for assessing a company’s financial health, both for the company’s executives and any potential investors, and are typically produced on a monthly or quarterly basis.

At heart, casino balance sheets are based on a simple equation:

Assets = liabilities + equity

And no matter how you rearrange it, the equation should balance.

Equity = assets - liabilities

Liabilities = assets - equity

If the statement is imbalanced, this most likely indicates that there was a mistake at some point during preparation.

So what are an online casino’s assets, liabilities, and equity?

Assets are anything the company owns that has value, either tangible or intangible, including the casino platform, cash reserves, hardware, goodwill (the difference between a company’s book value and purchase price) and branding/trademarks. They’re divided into current and non-current assets — or, more understandably, short-term and long-term assets.

Current or short-term assets are cash or anything the company expects to convert into cash in under twelve months, such as accounts receivable or debts owed to the company. Non-current or long-term assets are those that won’t be converted into cash in the next year, such as equipment, real estate, patents, or intellectual property.

Liabilities are anything the company owes to another party. Like assets, liabilities are either current or non-current. While assets are recorded as a positive number, liabilities are negative, which is usually indicated through the use of parentheses ().

In accounting for casinos and gaming, current liabilities — debts due within a year — can include accounts payable (goods or services received but not yet paid for, such as the revenue share owed to game developers or other suppliers), employee salaries, player winnings, taxes, fees, legal costs, loan repayments, and other expenses.

Equity is what belongs to the owners of the business after all of the liabilities have been accounted for. Equity is largely composed of shares (part or full ownership of the company) and retained earnings, which is calculated by subtracting all expenses from revenues. Retained earnings — ideally — accumulate over time.

Analyzing the balance sheet can help business owners calculate important accounting ratios, such as gross profit margin, net profit margin, and debt-to-equity ratio, which we’ll look at in part 2.

Balance sheets are usually arranged in three columns. The left-hand column displays the category for each item, the middle column shows the current figure, and the right-hand column shows the same figure for the previous year.

Income statement with example

The income statement, also known as profit and loss statements, displays a company’s financial performance during a month, a quarter, or a year, comparing revenues and expenses.

Income statements start with the company’s revenues and account for various costs as you work your way down, ending on earnings per share — total profit divided among all shareholders.

There are a few items most commonly found on an income statement.

The costs of goods sold or cost of sales are the direct costs that come with making a product or providing a service. The most obvious example of cost of sales for an online casino would be a gaming duty, a fee paid to the government in exchange for the right to organize games of chance. Cost of sales does not include things like marketing (a massive expenditure for iGaming brands). Sales minus cost of goods sold yields a number known as gross profit.

Then there’s the indirect costs, often called overhead — rent, salaries, insurance, administrative costs, legal costs, accounting costs, marketing costs, depreciation, and amortization. These costs are independent of sales — e.g., renting office space for your player support team costs the same each month whether you have 100 players or 1000, unless you expand to handle the extra workload. Subtracting your overhead costs from your gross profit leaves you with your operating profit.

Income statements will often feature the term EBITDA. Some investors argue that it doesn’t provide a full picture of a company’s financial situation, but it’s not meant to; EBITDA, which stands for Earnings Before Interest, Tax, Depreciation, and Amortization, is a measure of a company’s ability to generate revenue.

While investors and entrepreneurs in some corners are dismissive of EBITDA, it is routinely found on casino balance sheets. Looking at earnings without all the other considerations might seem a little unrealistic — ignoring them doesn’t mean they don’t exist — but it does give an unadulterated measure of the company’s performance.

Depreciation and Amortization appear similar at first — they describe changes over time in an asset’s worth. The differences are subtle, but crucial; depreciation describes the reduction of a tangible asset’s worth, while amortization spreads the cost of intangible assets over an extended period of time.

As success in the iGaming industry starts with a project’s ability to generate cash, EBITDA is one of the most commonly used figures in annual reports; it’s also the clearest method of comparing your casino to your competitors.

Cash flow statement with example

A cash flow statement accounts for all the cash that passed through a business during the stated time period — and how much stayed.

A cash flow statement has 3 sections: the operating section, the investing section, and the financing section.

Operating activities are your company’s core business — in this case, the cash inflow comes from customer deposits and losses, and cash outflow comes from customer wins and withdrawals — this is the amount of cash generated by normal business operations, taking both revenues and expenses into account.

Investing activities include investing in stocks, buying new equipment, and the sale or purchase of non-current assets that are not directly related to core operations.

Financing activities cover cash inflow and outflow from loans and changes in share capital related to funding the business. This section of the cash flow statement records loans (cash influx), payments (cash outflow),sold shares (cash inflow), or bought shares back from investors (cash outflow), as well as paying dividends to shareholders.

Once you account for all the activity in the operating, investing, and financing section, you’ll see exactly how the total amount of cash changed from the beginning to the end of the period covered.

A net influx of cash does not necessarily indicate profit, as the cash flow statement does not account for non-cash liabilities, such as payments made on long-term debt.

Direct v. indirect methods

The direct method of calculating cash flow is as straightforward as its name implies. Cash outflow is deducted from cash inflow, and the resulting number, negative or positive, is the total cash flow.

The indirect method, however, is often viewed as easier to produce. When taking this approach, the report begins with net income and then makes adjustments to eliminate non-cash elements from the financial picture. Comparatively, the direct method requires the inclusion of a line item for every instance of cash flow — a tremendous amount of labor.

Cash flow statement vs. income statement

The income statement and the cash flow statement seem, at first, nearly identical. If an income statement records revenue (money coming in) and expenses (money going out), why is there also a cash flow statement, which records cash inflow (money coming in) and cash outflow (money going out)?

The reason businesses have both is due to the fact that there are different methods of recording the information in accounting. Using the cash method, revenue is recognized when cash is received, and expenses are recorded when cash is paid out. An income statement prepared under the cash method is equivalent to a cash flow statement. However, according to international financial reporting standards (IFRS), accountants must use the accrual method, where revenue is recognized as it’s earned and expenses are recorded when they’re incurred.

The accrual method makes it easy to prepare cash flow statements by using figures from the balance sheet and income statement.

In the second part of our analysis of accounting for casinos and gaming we’ll look at how you can analyze sportsbook and casino financial statements. There are three main methods of analyzing financial statements — vertical, horizontal, and ratio analysis.

Vertical analysis with example

Vertical analysis entails working your way down either a balance sheet or an income statement and calculating each item as a percentage of its category.

In the vertical analysis of a balance sheet, each item is shown as a percentage of overall assets. This shows you, for example, what share of your total assets is accounted for by goodwill (essentially, a company’s reputation) and what percentage is cash. The same goes for the liabilities and equity section.

To calculate the percentages for a balance sheet, divide each line item by its category’s total. In the example below, the $167,000 of “Goodwill and other intangible assets” was divided by the $538,000 sum total of assets, showing that intangible assets accounted for 31% of the company’s holdings.

For an income statement, each item is divided by total sales (or revenue) and multiplied by 100.

You can also use vertical analysis across several sequential years to see trends over time.

Horizontal analysis with example

While vertical analysis primarily looks at a single point in time, horizontal analysis compares the company’s performance over two successive periods of time, going line by line through the statement.

Horizontal analysis can cover any period of time, but most commonly it’s used YoY (Year over Year) or QoQ (quarter over quarter).

To conduct a horizontal analysis, calculate the difference between your base and comparison year (in the example below, 2020 and 2021, respectively) and divide the result by the base year, then multiply the result by 100 to get a percentage. Once you have your percentages, you can start asking questions. If revenues are up but profits aren’t, what costs have increased, why, and what can be done?

For example, below, the difference between the two years’ revenues is $130 million. Dividing 130 million by 850 million and multiplying the resulting fraction shows growth of 15.3%.

As we go down the income statement, you can see which line items have grown and which have shrunk (negative numbers are indicated by parentheses). You can see that while revenues increased, so have costs of sales, marketing expenses, and other expenses.

You can use horizontal analysis to see if, for example, costs are growing at a disproportionate rate compared to revenues; if so, the casino must either increase sales through use of bonuses or other promotions or find ways to cut costs. However, the innate complication is that increased marketing efforts will come with increased marketing costs, so careful planning is necessary to make sure your strategy isn’t counterproductive.

One noticeable contribution to the 153% growth in operating profit is the steep dropoff in the exceptional items, which saw a 69% decrease (one example of exceptional items in the iGaming world would be the acquisition of new licenses).

Ratio analysis

Mainly used by investors, ratio analysis is another way of evaluating a company’s financial health.

Ratio analysis can be used to evaluate trends, or to look at the same aspect of your own company’s finances over successive years, or to compare your company against your competitors.

There are several different categories of ratio analysis. We’ll look at liquidity, solvency (or leverage), and profitability ratios.

Liquidity ratios

Liquidity ratios are used to analyze a company’s ability to cover its short-term liabilities without having to borrow money. They draw information from a company’s balance sheet, and concern themselves with liquid assets — cash or those that can be easily converted into cash.

The cash ratio compares cash to current liabilities.

Here’s the formula:

Cash ratio = cash / current liabilities

If the ratio is greater than 1, the company can pay off all of its current liabilities using the cash it has at hand, without having to liquidate any other assets. Online casinos, in particular, should have a high cash ratio, as they’re often required by their licensing authority to keep significant amounts of cash on hand to pay out winnings.

The current ratio in casino accounting measures a company’s ability to cover its current liabilities with its current assets. It differs from the cash ratio in that it includes all liquid assets (such as securities, bonds, accounts receivable), not just cash.

Here’s the formula:

Current ratio = current assets / current liabilities

A current ratio of less than 1 indicates that a company doesn’t have enough cash and other liquid assets to cover its short-term debts. However, a current ratio that’s too high, such as 3 or 4, could indicate that the company isn’t properly managing its working capital, letting huge pools of cash lay stagnant instead of putting them to work through investment or expansion.

The quick ratio measures a company’s ability to immediately pay down short-term liabilities with nothing but its most liquid assets — cash and cash equivalents (assets which can be converted into cash in a short period of time, like securities and accounts receivable).

Here’s the formula:

Quick ratio = (current assets - inventory) / current liabilities

The higher this number is, the better — 3 or 4 is good, indicating that the company is more than capable of meeting its current liabilities. However, a quick ratio of less than 1 indicates that your company will struggle to pay its short-term debts.

Solvency ratios

While liquidity ratios evaluate a company’s ability to pay its short-term liabilities, solvency (or leverage) ratios look at how easily a company can manage its non-current liabilities.

The equity ratio measures how much leverage, or debt, a company has by comparing its equity and assets.

Here’s the formula:

Equity ratio = total equity / total assets

Companies with an equity ratio of 0.5 or less are called leveraged, relying on debt for funding; those with an equity ratio of 0.5 and above are more conservative, as they rely on equity for funding instead of debt.

The debt-to-equity ratio shows how much a company is financing its operations with debt as opposed to its own assets by calculating how much debt it has for each dollar of equity. All the information is available on the balance sheet.

Here’s the formula:

Debt to equity = total liabilities / total shareholders’ equity.

If the total shareholders’ equity isn’t clearly itemized in your balance sheet, subtract total liabilities from total assets.

Companies incur debt when they borrow in order to expand, so debt isn’t necessarily a bad thing; however, interest paid on loans can accumulate over time.

A number higher than 2 is regarded as risky, with the risk increasing as the number rises. However, gambling is a risky enterprise to begin with, and if you sit down to work out the numbers, you’ll find that a number of industry juggernauts like 888 have debt-to-equity ratios over 2.

The debt-to-assets ratio shows how much of a business’s assets have been financed using debt.

Here’s the formula:

Debt-to-assets ratio = total liabilities / total assets

A ratio over 1 shows that a company is funding a significant amount of its assets with debt, and is technically insolvent. A ratio lower than 0.5 means that the company is largely funded by its own equity, a far more secure position.

The debt-to-capital ratio assesses your company’s risk of defaulting on its debts.

Total capital is the sum of all interest-bearing debt and all shareholders’ equity.

Here’s the formula:

Total debt / (total debt + total shareholder’s equity)

The higher the ratio is, the greater the risk for your company, as this indicates that too much of your funding is coming from debt instead of your own equity.

Profitability ratios

Profitability ratios, as the name implies, measure that most-important-of-all thing: your business’s ability to earn money.

The gross profit margin measures how much profit the business can generate from each dollar (or other unit of currency) of revenue earned.

Here’s the formula:

Gross profit margin = (Gross profit / revenue) * 100

Gross profit is calculated by subtracting the cost of goods sold from revenues. Divide this by revenue and then multiply the result by 100 to get a percentage — that’s your gross profit margin.

The operating profit margin measures how profitable a company was before accounting for taxes and interest.

Here’s the formula:

Operating profit margin = operating profit / total revenue * 100

Operating profit is calculated by subtracting costs of goods sold, operating expenses, and depreciation and amortization from revenues. Operating profit margin is indicative of how well-managed a company is, as it directly compares how much money is earned with how much was spent to earn it.

The net profit margin, which measures how much of every dollar of revenue makes its way to becoming net profit, is slightly more complicated to calculate. We arrive at net profit, lower down the income statement, by subtracting operating expenses, other expenses, interest, and taxes from gross profit.

Here’s the formula:

Net profit margin = (R - COGS - OE - O - I - T) / R * 100

Where:

R = Revenue

COGS = Cost of goods sold

OE = Operating expenses

O = Other expenses

I = Interest

T = Taxes

At first, it might seem that these are highly repetitive; how many times do you need to calculate profit, and what’s the point of calculating anything but the final number? But if you’re unsure of where the profits are leaking out, going step by step like this through your income statement will help point out which holes you can plug.

For example, if the biggest hit to your final profit margin comes along when calculating net profit margin, it could be that you’re simply paying too much in taxes and need to relocate to a more tax-friendly jurisdiction.

Conclusion

Perhaps the most important lesson here is the importance of a good online gambling accountant — but hopefully you’re more at home in the world of accounting than you were at the top of the page.

Tracking your financial performance is essential, but there are plenty of other statistics online casino operators need to keep track of; unique players, average bet, gross gaming revenue, and more. Luckily, the Business Intelligence module in our new and improved turnkey online casino platform tracks and sorts the vast amount of data generated by online casino platforms — and it’s just one of the platform’s unbelievably useful modules.

To learn more about your options for opening and running an online casino or sportsbook, get in touch for a free consultation.