Clint Murphy

Clint Murphy

17-11-2022

13:34

I've spent 22+ years studying Finance with the last 7 as a CFO, and I'll teach you everything you need to know about Financial Statements in the next 7 minutes:

The 3 financial statements you need to know: β€’ Balance Sheet - Are you Stable β€’ Income Statement - Are you Profitable β€’ Statement of Cash Flows - Will you Survive

β€’ Income Statement The income statement shows: β€’ If you're efficient β€’ If you're profitable β€’ How to make better decisions β€’ How much money you're making β€’ What costs you will need to control

β€’ Income Statement Structure The structure of the income statement is revenue minus expenses. Revenue is what you earn from sales services: β€’ Merchandise β€’ Revenue from services β€’ Miscellaneous revenue, such as interest

β€’ Expenses Expenses are 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.

β€’ Overhead expenses There are two categories of overhead expenses: β€’ 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.

β€’ 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.

β€’ Balance Sheet The balance sheet tells you whether your business is healthy: β€’ Is there cash β€’ Can you pay your bills β€’ How much debt do you have The structure of a balance sheet is: Assets = Liabilities + Equity

β€’ Assets are what you own: β€’ cash β€’ inventory (goods available for sale) β€’ accounts receivable (what people owe you) β€’ Fixed assets (land, machinery, equipment, and buildings) Increase your assets over time.

β€’ Liabilities are what you owe: β€’ accounts payable β€’ income tax payable β€’ mortgages and long-term debt Liabilities provide you working capital.

β€’ Equity is what you're worth If you sold all your assets and paid your liabilities, equity's what's left over: β€’ money contributed (common shares) β€’ profits taken out of the business (dividends) β€’ earnings retained in the business (retained earnings)

β€’ Balance sheet focus: β€’ how much cash is there β€’ can current assets cover liabilities β€’ can the company meet its debt obligations β€’ what is the debt to equity ratio (lower is healthier)

β€’ Statement of Cashflows How much cash did you receive or use over a period of time from: β€’ financing β€’ operations β€’ investments opening cash + net increase or decrease of cash during the period = ending cash

β€’ Cash flow from operating activities How much cash is generated from business activities: β€’ rent β€’ cash from sales β€’ income tax payments β€’ salary and wage expense β€’ Cash flow from investing activities

Includes a company's investments: β€’ purchase and sale of assets β€’ loans made to vendors or received from customers β€’ purchase or sale of machinery, plant, and equipment

β€’ Cash flow from financing activities You raise capital from investors, banks, and shareholders: β€’ capital raised β€’ dividends paid β€’ principal on debt β€’ principal repayments

β€’ Cash flow focus: β€’ Is cashflow positive β€’ Why is cashflow positive or negative β€’ 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: β€’ Balance sheet β€’ Income statement β€’ Statement of cash flows They tell you: β€’ Am I stable β€’ Am I profitable β€’ Am I going to survive

Thanks for reading! Follow me @IAmClintMurphy for more content like this. Retweet the first tweet to help more people see content you enjoy:

P.S. If you want to be better, achieve more and become financially free, you will love my free weekly newsletter. Every Thursday morning I'll simplify psychology, success and money straight to your inbox.


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