Reading the Scoreboard: How to Master Money
In business, your financial statements are your scoreboard. If you can’t read the scoreboard, how do you know the score? And if you don’t know the score, how can you tell who’s winning?
Accounting is the language of business. As a business owner or leader, knowing your numbers is a key component of being able to lead your employees and make decisions. While it’s not necessary to be a CPA, it is important to have a basic understanding of numbers and accounting.
Below are three scoreboards to start getting comfortable with:
A Balance Sheet is a snapshot of your company’s current state. It shows your company’s condition at any given moment in time. On the left are the “things” and “stuff” that you have in your business.
The things at the top are liquid, which means that they can be used up within 12 months. The things at the bottom are hard, which means that you can’t liquidate them within 12 months.
You buy your things and stuff with money that you either owe or own. For example, you could be reading this article on a computer that you own…which you bought by either using your savings or by taking out a loan.
The trick is that the left (what you own) has to balance the right (what you owe). Remember: what you have must have come from what you own or owe, nowhere else. The official names for these are Assets, Liabilities, and Equity.
Profit & Loss
Profit & Loss is a report about how much profit you expect to make. To figure this out, subtract your expenses from your sales. Your sales minus your expenses equal your profit (S – E = P).
The key to utilizing a P&L statement is to analyze what is happening above the bottom line. The report shows your net earnings or loss over a period of time, so you should be using it to run comparisons of your income and expense trends (monthly and yearly). By having an annual benchmark, you can then adjust your sales and marketing strategies, as well as look for ways to manage your expenses. Additionally, by analyzing your net profit over time, you will be better able to budget for future profitability and growth opportunities.
Cash Flow Statement
There are 3 types of cashflow:
- Operating: What you make out of running your operations.
- Investment: How much money you’re investing in assets.
- Financing: How much money you’re borrowing to run your business.
Each type of cashflow can have a minus or a plus. For example, sales produce positive operating cashflow, while paying expenses results in negative operating cashflow. Keeping track of these in your cashflow statement can help you manage your cash transactions properly.
Remember: Your numbers are a result of activities that you do, and activities happen because of management decisions that you make. If you’re not getting the numbers that you want, review your activities and the decisions behind those activities. And if you’re not happy with that, review your management.