If you have anxiety when looking at a financial statement, I get you.
When I first graduated from college with my accounting degree, I went to work for a big company with tons of layers and all sorts of corporate policies.
Even despite this, I was lucky enough to get to do a presentation or two to the CEO and Board of Directors.
I prepared for these presentations and knocked them out of the park… I was a big shot.
So, when a few short years later I got an opportunity to join a small, growing business as their only Accountant, I knew this was my big break.
This meant meeting weekly with the CEO to talk company strategy and being solely responsible for the financial well-being of the company.
I was ready to tackle this challenge.
Just a few weeks in, I got my first chance to impress… we were going over the first set of financial statements. As we looked at them, I went to speak but no words came out.
In one of the most important moments in my career, I’d froze.
It wasn’t that I didn’t understand the concepts, I did.
I just hadn’t internalized the concepts enough… gotten enough practice and exposure to them that I could concretely tell my new CEO what was happening.
This was the beginning of a rediscovery of what I knew and how to communicate it…
The thing is, he didn’t ask me a hard question.
“So, why do you think our labor margins went down?”
Because I didn’t yet have a good enough grasp of those financials, or financials in general, I was unable to answer that question for him.
So what did I say? “I don’t know, let me look into it and let you know.”
Thankfully he accepted that, but it could have ended much differently.
When you think about a business, it’s often said that the goal is to make money.
But, what does it mean to “make money?”
When you think more deeply about this, you make money when you create value.
An hourly worker gets paid for the hours they work. The same for many consultants.
But as you move up the scale, value creation becomes less coupled to hours spent.
That’s where owning a business is so powerful: when done correctly, you’ve disconnected value creation from your time input.
So, how does that tie back to financials? Let’s look at 2 of the statements:
Balance Sheet: Assets = Liabilities + Stockholder’s Equity
Income Statement: Revenue – Expense = Net Income
With the Balance Sheet, equity tells us the book value of the company.
Assets tell us the “value” of the tangible and intangible things we hold.
Liabilities tell us what we owe against those things.
Equity, as the difference between them, tells us what the book value of what we owe is.
In the equity portion of the Balance Sheet, you’ll see Retained Earnings.
Retained Earnings are generated from the profits your business has, which come from the Income Statement.
So by generating revenue, as long as our expense stays below the revenue level, we’re generating profit, which results in value generation on the balance sheet.
So, what it ultimately comes down to: are people willing to buy your product, service, or idea for more than it costs to generate?
If so, you create value, which should reflect in your financial statements.
So, when looking at your business, let’s look at 2 levers to increase value:
- Increase Revenue
- Decrease Expenses
There are a few ways to increase revenue:
- Incur expense with the goal of increased revenue
- Convert cash to an income-producing asset
- Spend your time to sell more (direct or indirect)
The goal with each of these is to increase revenue more than expense, thus flowing to Net Income.
This is pretty self-explanatory.
When revenue stays steady and expenses decrease, your net income will increase.
The increased net income goes directly to Retained Earnings, which increases Equity and generates value.
This is not meant to be a comprehensive model, but to introduce you to the concept of value creation and how that’s reflected on the financial statements.
If you’d like to learn more specifics about the financial statements, I’d encourage you to enroll in my cohort.
You have just over a week to enroll, but we have a limited number of spots. I want to keep the class size small enough to be able to assist each student individually, so we’re only accepting 13 more students.
Enroll today: kurtishanni.com/cohort
If you want to better understand financial statements, here are 3 ways I can help: