Clint Murphy

Clint Murphy



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

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