You only need to know 3 things to understand finance.
I could have saved myself:
• Accounting degree
• Master's in accounting
• 10 years working at KPMG
• 10+ years as a VP of Finance / CFO
If I just learned to read these 3 financial statements:
I could have saved myself:
• Accounting degree
• Master's in accounting
• 10 years working at KPMG
• 10+ years as a VP of Finance / CFO
If I just learned to read these 3 financial statements:
The three financial statements you need to know are:
• Balance sheet - are you stable
• Income statement - are you profitable
• Statement of cash flows - will you survive
• Balance sheet - are you stable
• Income statement - are you profitable
• Statement of cash flows - will you survive
1. Income statement
The income statement determines:
• are you efficient
• are you profitable
• how to make better decisions
• how much money do you make
• what costs do you need to control
The income statement determines:
• are you efficient
• are you profitable
• how to make better decisions
• how much money do you make
• what costs do you need to control
• Income statement structure
The structure of an income statement is revenue minus expenses.
Revenue is what you earn from sales or provision of:
• Merchandise
• Revenue from services
• Miscellaneous revenue, such as interest
The structure of an income statement is revenue minus expenses.
Revenue is what you earn from sales or provision of:
• Merchandise
• Revenue from services
• Miscellaneous revenue, such as interest
• Expenses
Expenses can be broken into:
Cost of goods sold - what it costs you to manufacture what you sell.
Overhead expenses are costs required to run the business that aren't directly tied to revenue.
Expenses can be broken into:
Cost of goods sold - what it costs you to manufacture what you sell.
Overhead expenses are costs required to run the business that aren't directly tied to revenue.
• Overhead expenses
There are two categories of overhead expenses:
• Variable costs
Variable costs move up or down based on a level of activity:
If every unit we sell requires a $1 box. If we sell 100 units, it costs $100 and if we sell 5 units, $5.
There are two categories of overhead expenses:
• Variable costs
Variable costs move up or down based on a level of activity:
If every unit we sell requires a $1 box. If we sell 100 units, it costs $100 and if we sell 5 units, $5.
• Fixed costs
Fixed costs don't change with levels of activity.
You pay $10,000 per year in rent whether you sell 100 units or you sell 5 units.
Minimize fixed costs and control your variable costs.
Fixed costs don't change with levels of activity.
You pay $10,000 per year in rent whether you sell 100 units or you sell 5 units.
Minimize fixed costs and control your variable costs.
• Balance Sheet
The balance sheet tells you whether your business is healthy:
• Is there cash
• Can you pay your bills
• How much debt do you have
The structure of a balance sheet is:
Assets = Liabilities + Equity
The balance sheet tells you whether your business is healthy:
• Is there cash
• Can you pay your bills
• How much debt do you have
The structure of a balance sheet is:
Assets = Liabilities + Equity
• Assets are what you own:
• cash
• inventory (goods available for sale)
• accounts receivable (what people owe you)
• Fixed assets (land, machinery, equipment, and buildings)
Increase these buckets over time.
• cash
• inventory (goods available for sale)
• accounts receivable (what people owe you)
• Fixed assets (land, machinery, equipment, and buildings)
Increase these buckets over time.
• Liabilities are what you owe:
• accounts payable
• income tax payable
• mortgages and long-term debt
Liabilities provide working capital.
• accounts payable
• income tax payable
• mortgages and long-term debt
Liabilities provide working capital.
• Equity is what you're worth
If you sold your assets and paid your liabilities, equity's what's left over:
• money contributed (common shares)
• profits taken out of the business (dividends)
• earnings retained in the business (retained earnings)
If you sold your assets and paid your liabilities, equity's what's left over:
• money contributed (common shares)
• profits taken out of the business (dividends)
• earnings retained in the business (retained earnings)
• Balance sheet focus:
• how much cash is there
• can current assets cover liabilities
• can the company meet its debt obligations
• what is the debt to equity ratio (lower is healthier)
• how much cash is there
• can current assets cover liabilities
• can the company meet its debt obligations
• what is the debt to equity ratio (lower is healthier)
• Statement of cashflows
How much cash did you receive or use over a period of time from:
• financing
• operations
• investments
opening cash + net increase or decrease of cash during the period = ending cash
How much cash did you receive or use over a period of time from:
• financing
• operations
• investments
opening cash + net increase or decrease of cash during the period = ending cash
• Cash flow from operating activities
How much cash is generated from business activities:
• rent
• cash from sales
• income tax payments
• salary and wage expense
How much cash is generated from business activities:
• rent
• cash from sales
• income tax payments
• salary and wage expense
• Cash flow from investing activities
Includes a company's investments:
• purchase and sale of assets
• loans made to vendors or received from customers
• purchase or sale of machinery, plant, and equipment
Includes a company's investments:
• purchase and sale of assets
• loans made to vendors or received from customers
• purchase or sale of machinery, plant, and equipment
• Cash flow from financing activities
You raise capital from investors, banks, and shareholders:
• capital raised
• dividends paid
• principal on debt
• principal repayments
You raise capital from investors, banks, and shareholders:
• capital raised
• dividends paid
• principal on debt
• principal repayments
• Cash flow focus:
• Is cashflow positive
• Why is cashflow positive or negative
• Are operations strong enough without financing or investments
Can your company survive from operations or is it alive because of investments and financing.
• Is cashflow positive
• Why is cashflow positive or negative
• Are operations strong enough without financing or investments
Can your company survive from operations or is it alive because of investments and financing.
TL;DR:
Financial statements don't need to be scary.
There are three financial statements you need to know:
• Balance sheet
• Income statement
• Statement of cash flows
They tell you:
• Am I stable
• Am I profitable
• Am I going to survive
Financial statements don't need to be scary.
There are three financial statements you need to know:
• Balance sheet
• Income statement
• Statement of cash flows
They tell you:
• Am I stable
• Am I profitable
• Am I going to survive
This has been a "Cheat Sheet" on how financial statements work.
These threads take a lot of time and experience to write.
If you found value, please, return the favor:
1. Follow @IamClintMurphy
2. Retweet the 1st Tweet:
These threads take a lot of time and experience to write.
If you found value, please, return the favor:
1. Follow @IamClintMurphy
2. Retweet the 1st Tweet:
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