Calling all bright and beautiful beginners!
It’s time to start understanding financial statements.
Because you love math and you love money and you can’t wait to get started with the spreadsheets and the formulas.
(Hey, where’d everybody go?)
For all of you who are left standing, I have some news you can use!
Understanding financial statements empowers you by:
- Helping you feel confident and in control
- Giving you clarity about your business’ health and
- Allowing you to serve other bright and beautiful beginners who may be as worried about it as you once were
With these benefits in mind, let’s get started.
There are three important types of financial statements (also called “financials”) that bright and beautiful beginners need to know. They are:
- Income statement
- Balance sheet (or Profit and Loss statement) and
- Cash flow statement
Geni Whitehouse, CPA, America’s “Countess of Communication” has provided us “right-brain” (creative thinking types) with an accessible metaphor for understanding financial statements.
She describes the three types of financial statements as a tree.
Like a tree, your business yields a certain amount of “fruit” each year. Your income statement captures, in numbers, how much your business has produced in terms of dollars.
Here is a picture of an Income Statement template:
Balance sheets are like the trunk of your tree.
Balance sheets show the results of your cumulative efforts over time.
Your assets equal your liabilities (what you owe) together with your equity. These two figures must be equal, which is why it is called a balance sheet.
Here is a picture of a Balance Sheet template:
To finish the metaphor, Whitehouse says that cash is like water that sustains a tree.
People use cash flows to capture how money comes into a business and where it goes once it’s there.
Here is a picture of a Cash Flow template:
Success in Business
“Success in business,” states Whitehouse in her quite excellent SlideShare, “requires a focus on all three financial statements.”
Understanding financial statements is important for practical reasons, including:
- Getting loans
- Creating confidence in potential collaborators and
- Understanding whether your business is succeeding
The term “bottom line” comes from the literal bottom line of your Income Statement, which is your net income (your income after expenses).
Now you have a mental picture of what financial statements mean “beyond the numbers” and you even know the true meaning of the bottom line.
What To Do Next
If you are a math whiz and love numbers, you’ve probably already figured this stuff out. If you are more like me and crunching numbers is the adult equivalent of eating spinach, I suggest you hire a tutor, coach or consultant to sit down with you and help you create a spreadsheet that you can then fill out with numbers from your business.
Pro tip: Spinach is good for you.
What’s your experience with financial statements? Let us know in the comments!
Whitehouse, Geni. Understanding Financial Statements. SlideShare presentation, March 2, 2013.
Zwilling, Martin. 10 Metrics Every Growing Business Must Keep An Eye On. Forbes. September 28, 2011.
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