Although iGaming is a special business model, it is still a business in essence and is not much different from other industries. For any business industry, the core focus is always revenue and profit and loss. But there are some special features of the iGaming industry: first, its operating costs are usually high. After deducting fixed costs, the largest expense is resource costs, which include marketing and payment channels; second, due to the lack of physical stores and tangible products, it is difficult to intuitively evaluate its operating conditions through traditional methods. Therefore, in order to achieve good revenue in this iGaming industry, gambling platform operators need to manage and evaluate capital risks like managing financial investments.

The key to fund management is to continuously track and evaluate the operating performance of your iGaming platform through detailed analysis of financial statements. Financial statements can not only reflect the current operating conditions but also make relative plans and decision-making basis for future gambling market trends.

Today, TC-Gaming will discuss the accounting knowledge of the iGaming industry, especially the various financial statements required to operate an iGaming platform. We will introduce the types, contents, and uses of these statements, hoping that through this financial knowledge, we can help you better assess business risks and optimize resource allocation.

What financial statements are required for iGaming?

There are three core types of financial statements for iGaming platforms, each of which presents the performance of your iGaming business from a different perspective. For example, the balance sheet reflects the company's financial status at a specific point in time, while the income statement shows the operating results over a period of time, and the cash flow statement tracks the inflow and outflow of funds. Each of these financial statements focuses on different financial aspects, so you need to combine these three statements for a comprehensive analysis to fully understand the operation of your gambling business.

1. Balance Sheet:This summarizes the overall financial status of your iGaming platform
2. Profit and Loss Statement:Records total revenue and expenses over a period of time
3. Cash flow statement:A detailed listing of every cash inflow or outflow during a specific period of time.

What is an iGaming balance sheet?

The balance sheet, also known as the statement of financial position, is a key tool used to assess the financial health of a company. It is not only useful to the company's management but also important to potential investors. Generally, the balance sheet is generated on a monthly or quarterly basis.

In fact, the core principle of the balance sheet is very simple, so don't be scared by its name. It has a formula:

Assets = Liabilities + Shareholders' Equity

No matter how you adjust it, the formula must be balanced. If it is not balanced, there may be some errors in the report. You may not understand whatan unbalanced formula means.

Let's take a simple example:

(Suppose your company has $1 million in assets, including cash, inventory, equipment, etc. But if you record liabilities of $600,000 and stockholders' equity of $300,000, then $600,000 (liabilities) + $300,000 (stockholders' equity) = $900,000. This is not equal to the $1 million in assets, which means the formula is unbalanced.)

Alternatively, if you want to know what your shareholders' equity is, you can use this formula:

Shareholders' Equity = Assets - Liabilities

Similarly, you can also subtract shareholders' equity from assets to get the amount of liabilities.

Liabilities = Assets - Shareholders' Equity

What are the assets, liabilities, and shareholders’ equity of an iGaming platform?

What are assets?

An asset is anything that a company owns that has value and can be tangible (such as equipment) or intangible (such as brands and trademarks). For example, a gambling platform itself, cash reserves, hardware, goodwill (the difference between the company's book value and the purchase price), and brands and trademarks are all assets of a company. Assets can be divided intoshort-term assetsandlong-term assets:

Current assets are assets that a company expects to convert into cash within 12 months, such as accounts receivable or debt owed to the company.

Non-current assets refer to assets that are not expected to be converted into cash within one year, such as equipment, real estate, intellectual property, etc.

What is liability?

Liabilities are anything a company owes to other parties, just like assets. In financial statements, liabilities are usually shown as negative numbers, marked with parentheses (). For gambling platform operating companies, commonshort-term liabilitiesandlong-term liabilities.

Current liabilities:Accounts payable (for example, payments to game developers or other suppliers), employee salaries, player bonuses, taxes, legal fees, loan repayments, etc.

Long-term liabilities (Non-current liabilities):Refers to debts that the gambling company expects to need to repay in more than one year. Unlike short-term liabilities, long-term liabilities have a longer repayment period and usually include debts that the company incurs for long-term development. For example: long-term loans, bonds, and lease fees.

What is shareholders' equity?

Shareholders’ equity is the portion of an iGaming company that belongs to its owners after all its liabilities have been paid. Shareholders’ equity consists primarily ofshares(partial or full ownership of the company) andretained earnings(which is what remains after all expenses have been subtracted from revenue). Ideally, retained earnings should accumulate over time.

Therefore, by analyzingthe balance sheet, companies can calculate some important financial ratios, such as gross profit margin, net profit margin, debt-to-equity ratio, etc.

What is a Profit and Loss Statement

The income statement(also called the profit and loss statement) shows a company's financial performance for a month, quarter, or year. It compares revenues to expenses to show how profitable the company was during a specific period of time. Typically, the income statement starts with the company's total revenues, then deducts various costs step by step to get earnings per share (i.e. total profit divided by the number of shareholders).

What are the common items on the income statement?

1. Cost of sales: Also known as " cost of goods", it is the cost that a company pays directly for a product or service. But for iGaming platforms, the most direct cost of sales is to pay gambling taxes to the government. If you want to open a legal gambling platform, paying taxes is a necessary expense. Marketing expenses are not included in the cost of sales but are considered indirect costs. (Sales revenue minus sales costs will give you gross profit)
2. Indirect costs: These are generally called " operating expenses " and include: rent, salaries, insurance, administrative fees, legal fees, accounting fees, marketing fees, depreciation, and amortization. These costs have nothing to do with the sales of the gambling business. For example, whether you have 100 players or 1,000 players, the rent of the office for the player support team will be the same every month unless you expand your territory. (Gross profit minus indirect costs gives you operating profit).
3. What is EBITDA?It is earnings before interest, taxes, depreciation, and amortization, and is an indicator of a company's ability to generate revenue. However, some people have questioned the significance of this indicator. However, it is still commonly used for iGaming operators. Because EBITDA helps companies or investors better see the company's "actual operating performance" without being disturbed by non-operating factors such as financial structure, tax policy, or asset depreciation. Therefore, it reflects how much money a company can make without considering finance, taxation, and asset depreciation. Simply put, EBITDA can "exclude" external factors and more intuitively understand the cash flow generation ability and operating efficiency of the gambling company's business. But don't forget that the excluded factors(such as interest or taxes)* are actually very important to the financial health of the gambling platform operating company and cannot be ignored. EBITDA is generally used frequently in annual reports.
4. Depreciation and amortization:These two may seem similar, but there is a difference. Depreciation refers to the decrease in the value of tangible assets over time, while amortization is the spread of the cost of intangible assets over a period of time.(For example, suppose a company purchases a software copyright worth $1 million and expects it to be used for 10 years. The company will not count the entire $1 million as cost in the year of purchase but will record $100,000 in amortization expenses each year until the $1 million cost is fully spread over 10 years. The purpose of this is to better match the use of assets with revenue, reflecting the costs incurred each year for using the intangible asset.)

What is a Cash Flow Statement?

The cash flow statement records the cash inflows and outflows of a company's cash over a certain period of time, as well as how much cash is left at the end. The cash flow statement is usually divided into three parts: operating part, investing part, and financing part.

• Operational:This is the company's core business activities. In the gambling industry, cash inflows mainly come from customer deposits and losses, while cash outflows come from customer wins and withdrawals. This also includes cash inflows from company revenues and cash outflows to pay for various operating expenses (such as wages, materials, rent, etc.). This part of cash flow can help companies understand the profitability of their daily operations and cash management.
• Investment:This includes investing in stocks, purchasing equipment, and buying and selling long-term assets that are not related to core operations. (For example, an iGaming platform purchases a long-term asset such as a server. This expenditure will be shown as a negative number (cash outflow) on the cash flow statement. But if you look at the balance sheet, the same asset will be shown as a positive number. Even if you sell it, it still has a certain residual value).

Note:Net cash inflows do not necessarily mean profitability because the cash flow statement does not take into account non-cash liabilities, such as long-term debt.

• Financing: cash flows related to fundraising, such as loans, equity changes, etc. For example, cash inflows from loans, cash outflows from repayments, cash inflows from selling stocks, cash outflows from repurchasing stocks, or dividends paid to shareholders.

Net cash inflows do not necessarily mean profitability because the cash flow statement does not include non-cash liabilities such as long-term debt repayments.

Methods for calculating cash flow

Direct Method vs Indirect Method

• Total GDP: According to the latest economic data released by the World Bank, Peru's Gross Domestic Product (GDP) in 2022 was approximately $242.6 billion. Direct method: As the name suggests, it is to directly deduct the amount of cash outflow from the cash inflow, and the result is the total cash flow.

• Total GDP: According to the latest economic data released by the World Bank, Peru's Gross Domestic Product (GDP) in 2022 was approximately $242.6 billion. Indirect method: Relatively easier to operate. The indirect method starts with net income and then gradually adjusts to exclude non-cash factors. In contrast, the direct method requires recording every cash flow, which is more labor-intensive.

Note: If you see a"net increase in cash flow", it may not mean that the gambling platform operating company is actually profitable, but it just reflects the cash flow.

Cash Flow Statement vs. Income Statement

At first glance, the income statement and cash flow statement appear to record the same information. Both report revenue and expenses, so why do we need to use both financial statements? The answer to this question involves subtle differences in accounting methods that affect the presentation of a business's financial situation.

The reason why both methods are used at the same time is mainly because of the differences in the way accounting records information. The cash method is an intuitive method that recognizes revenue when cash is actually received and records expenses when cash is actually paid. The income statement prepared according to the cash method is similar in nature to the cash flow statement. However, the International Financial Reporting Standards (IFRS) require accountants to use the more complex accrual method. Under this method, revenue is recognized when it is earned, not when cash is received; similarly, expenses are recorded when they are incurred, not when cash is paid. This method better reflects the actual operating conditions of the company. (Note: Because there will be a time difference in the middle, for example, the contract you sign today is a one-year contract, but the payment may be in installments one year later. At the same time, currencies and exchange rates will fluctuate over time, so the transaction amount will be calculated instead of the amount after payment.)

One advantage of the accrual method is that it makes it relatively simple to compile a cash flow statement using data from the balance sheet and income statement. This method gives a more complete picture of a business's financial health because it takes into account transactions that have not yet been converted into cash.

Three ways to analyze the financial statements of iGaming companies

How to analyze the financial statements of iGaming companies? There are three core methods: vertical analysis, horizontal analysis, and ratio analysis. Each method can show the financial status of your gambling company from different angles.

Vertical Analysis

Vertical analysis is really just looking down the balance sheet or income statement at each line item and calculating what percentage they represent of the entire category.

In the vertical analysis of the balance sheet, each item is displayed as a percentage of total assets. For example, you can see how much of the company's reputation (also known as goodwill) is a percentage of total assets, and how much is cash. The same is true for the liabilities and shareholders' equity sections.

For example, if a company has $167,000 in "goodwill and other intangible assets" and its total assets are $538,000, you can calculate that intangible assets make up 31% of the company's total assets.

In the vertical analysis of the income statement, each item is divided by total sales (or revenue) and multiplied by 100. This way, you can see the proportion of total revenue that each expense accounts for and understand the company's cost structure.

You can also use this method to analyze several years of data to see how the company's financial situation has changed so that the trend is clear.

Horizontal analysis

Unlike vertical analysis, which focuses on a single point in time, horizontal analysis focuses on comparing the company's performance over different periods of time. Common horizontal analysis methods are year-on-year (YoY) or quarter-on-quarter (QoQ). In this way, you can find out how the company's business has grown or shrunk over different time periods.

The steps for performing a horizontal analysis are very simple: First, calculate the difference between the base year and the comparison year (for example, the difference in revenue between 2020 and 2021). Then, divide the difference by the base year's value and multiply by 100 to get the percentage of growth. For example, if a company had $850 million in revenue in 2020 and increased it by $130 million in 2021, this would calculate a growth rate of 15.3%.

By looking at several years of income statements, you can clearly see which items have grown and which have shrunk. For example, although revenue has increased, sales costs and marketing expenses have also increased. At this time, you can think about whether costs have increased too fast. If so, the company may need to increase sales or cut costs to maintain profits.

What is Ratio Analysis

Ratio analysis is a common method used by investors to assess the financial health of a company. This method can be used to track the trend of a company's financial data or compare it with its competitors. Ratio analysis involves several categories, the most common of which include liquidity ratios, solvency ratios (also called leverage ratios), and profitability ratios.

(To elaborate, ratio analysis measures the financial performance of a company by calculating and interpreting financial ratios, especially in terms of short-term debt repayment ability, operating efficiency, and profitability. It helps gambling platform company managers and investors better understand the current financial situation of the gambling platform and determine whether the gambling platform has sufficient capacity to cope with short-term or long-term debts. It also provides a basis for gambling platform companies to adjust their operating strategies to improve overall operating efficiency and profitability.)

Below are a few important ratios used in the gambling industry.

Cash Ratio

The cash ratio measures a company's ability to pay short-term debts with the cash on hand. It focuses only on the cash a company actually has and does not take into account other current assets.

Formula: Cash Ratio = Cash / Current Liabilities

The cash ratio shows whether a company can immediately pay off all of its short-term debts with cash. A ratio greater than 1 means that the company has enough cash to meet short-term liabilities without having to rely on other assets.

Maintaining a high cash ratio is particularly important in the gambling industry, where governments and regulators often require gambling companies to have large amounts of cash to pay player bonuses or other immediate expenses. A high cash ratio also gives investors and managers more security, meaning that the company can still meet its short-term obligations even when cash flow fluctuates.

Current Ratio

The current ratio measures the ability of a gambling company to pay off its short-term debts with its current assets (including cash, accounts receivable, inventory, etc.). The current ratio is a more comprehensive indicator because it includes not only cash but also assets that can be quickly converted into cash.

Formula: Current Ratio = Current Assets / Current Liabilities

If the current ratio is lower than 1, it means that the company may face short-term funding pressure and be unable to repay liabilities through existing current assets; this will bring financial risks to the company. However, if the current ratio is too high (for example, greater than 3), it may mean that the company is not making full use of current assets for investment or expansion, but leaving these assets idle. For the gambling industry, a reasonable current ratio is important because it determines whether the company has sufficient liquidity to deal with short-term debts and pay player bonuses.

Quick Ratio

The quick ratio (also called the acid-test ratio) is similar to the current ratio, but it considers only the most liquid assets—those that can be quickly converted to cash, such as cash, accounts receivable, and market securities—and excludes assets such as inventory.

Formula: Quick Ratio = (Current Assets - Inventories) / Current Liabilities

The quick ratio is defined as a measure of how well a company can meet its short-term obligations with more liquid assets, such as cash and accounts receivable, without relying on long-term assets or unfinished transactions. Generally speaking, the higher the quick ratio, the better, and 3 to 4 is usually a good range. A ratio below 1 indicates that the company may not be able to quickly repay its short-term liabilities.

In the gambling industry, due to the high demand for cash liquidity and immediate expenditure, the quick ratio is more important. It determines whether a gambling company has sufficient liquidity to respond to market changes or deal with urgent matters.

Solvency Ratio

Solvency ratios are used to assess a company's ability to meet long-term debt, not just short-term debt. Unlike liquidity ratios, which focus on whether a company can quickly repay short-term debt, solvency ratios (or leverage ratios) focus more on a company's long-term financial health, specifically how it manages and repays long-term debt. Here are some common solvency ratios:

1. Equity Ratio

By comparing a company's total assets to its shareholders' equity, this ratio tells us the extent to which a company relies on debt financing.

The formula is: Equity ratio = total shareholders' equity / total assets

Simply put, companies with equity ratios below 0.5 are more dependent on debt financing and are called "leveraged companies"; while companies with equity ratios above 0.5 are more dependent on shareholder equity to maintain operations and have relatively lower risks.

2. Debt-to-Equity Ratio

The 2018 Debt to Equity ratio more directly shows how much debt a company uses to support each dollar of shareholder equity. In other words, it measures the extent to which a company is operating through debt rather than equity (shareholder investment).

The formula is Debt-to-equity ratio = Total liabilities / Total shareholders' equity.

If the ratio is over 2, it means that the company relies more on debt to operate, and the risk will increase accordingly. However, risk and reward often coexist, especially in the gambling industry, where some large companies also have a high debt-to-equity ratio in their operations.

3. Debt-to-asset ratio

To understand the degree of financial leverage of a company and its reliance on debt to operate, you need to look at the debt-to-asset ratio, because the debt-to-asset ratio measures the proportion of a company's assets financed by debt, indicating how much of the company's assets are obtained through debt.

The formula is: Debt-to-asset ratio = total liabilities / total assets

If the ratio is over 1, it means that the company mainly operates through debt and is in a high-risk state; if the ratio is below 0.5, it means that the company is relatively stable and mainly relies on shareholders' equity to support operations.

3. Debt-to-Capital Ratio

Assess the extent to which a company is financed through debt, reflecting the likelihood of a company defaulting or its financial risk. This ratio measures the proportion of total debt to company financing, showing how much of the company's funds rely on debt rather than shareholders' own capital in its operations.

Formula: Debt-to-equity ratio = Total debt / (Total debt + Total shareholders' equity)

When a company has high debt, the debt-to-equity ratio will rise accordingly, which means that most of the company's operations are supported by borrowing. If this ratio is high, it may indicate that the company relies on external borrowing to expand or maintain operations, resulting in increased financial burden, especially in the face of market fluctuations or economic downturns, which may face the risk of default.

However, not all high debt-to-equity ratios are negative. Through proper leverage management, borrowed funds can be used to expand the business, especially in capital-intensive industries, such as our gambling industry. Through borrowing, it is possible to quickly expand its market share or upgrade technology without relying on shareholders to continuously inject funds.

Profitability Ratio

As the name suggests, it is a ratio used to measure a business's ability to make money. In simple terms, it is used to evaluate the business's operating efficiency and profitability. It can help you understand how much profit your bookmaker can make from its revenue. Profitability ratios include the following ratios.

Gross profit margin

Gross profit margin is used to measure how much profit can be converted from each dollar of revenue. The specific formula is as follows:

Formula: Gross profit margin = (gross profit/revenue)*100%

Gross profit is calculated by subtracting the cost of goods sold from total revenue. The gross profit margin tells you how much profit the bookmaker has left after deducting the costs of producing or providing the service. The higher the ratio, the more money the company makes.

Operating profit margin

Operating profit margin measures how much a company earns before paying taxes after deducting costs such as operating expenses, depreciation, and amortization. This ratio reflects the operating efficiency of a business and shows how management uses resources to maximize profits. The formula is as follows:

Operating profit margin = operating profit / total revenue * 100

The operating profit margin shows how much profit your bookmaker has left after deducting costs during the operation process. It directly reflects the efficiency of the company in controlling costs and increasing revenue.

Net Profit Margin

Net Profit Margin is a little more complicated, and it calculates the company's final profitability after paying all expenses (including sales costs, operating costs, taxes, interest, etc.). The formula is as follows:

Net Profit Margin = (R - COGS - OE - O - I - T) / R * 100

in:

• R is income

• COGS is the cost of goods sold

• OE is operating expenses

• O is other expenses

• I is interest

• T is tax

This ratio ultimately tells you how much of each revenue point is actual net profit, the part that can actually be converted into profit after all costs are paid out.

At first glance, calculating these profits may seem a bit repetitive, but each ratio has a different meaning, helping you gradually dismantle the company's financial situation and find out where the problem lies. For example, if the net profit margin is particularly low, it may be that taxes or other additional expenses are high. Therefore, through these ratio analyses, you can find problems in certain aspects of the company, such as excessive management costs or heavy tax burdens, and then adopt corresponding strategies to adjust and optimize.

Summary

The three core financial statements, namely the balance sheet, income statement, and cash flow statement, comprehensively reflect the financial status, operating results, and cash flow of the gambling platform. We provide gambling platform operators with tools to comprehensively evaluate the financial health, operating efficiency, and profitability of the platform through the calculation and analysis of various financial ratios, including but not limited to the current ratio, quick ratio, debt-to-asset ratio, debt-to-equity ratio, gross profit margin, operating profit margin, and net profit margin. These ratios can not only help operators understand the current financial status but also provide an important basis for future decision-making.

While tracking financial performance is important for the successful operation of a gambling platform, iGaming operators also need to pay close attention to many other key statistics to fully understand the operation of their gambling business. These data include, but are not limited to: the number of players (reflecting the user base of the platform), the average bet amount (reflecting the betting behavior of users), the total gambling revenue (directly reflecting the platform's revenue capacity), user retention rate (measuring the platform's attractiveness and user loyalty), game type preference (helping to optimize the game portfolio), payment processing time (affecting user experience), and marketing campaign effectiveness (evaluating promotion strategies). These indicators complement financial data to allow gambling operators to fully control the operating status of the platform, optimize user experience, and enhance the platform's market competitiveness, thereby formulating more effective business strategies.

With 17 years of industry experience, TC-Gaming focuses on the white label iGaming and provides efficient and flexible gambling platform customized solutions for gambling platform customers. It can flexibly adjust according to market demand and continue to maintain competitiveness and profitability. Whether in technical support, operating data, or customer service, it provides customers with all-round support. I believe that working with TC-Gaming will be a solid partner for you in the overseas gambling market.