3. The Silent Killer Ruining Your Business

Understanding Financial Statements: A Deep Dive

In this episode of the Energetic CFO Podcast, host Tiffany, an advocate for financial literacy and business success, explains how to read and interpret financial statements to make better financial decisions. Tiffany breaks down the income statement (P&L), balance sheet, and cash flow statement, making complex financial concepts easy to understand. She highlights the importance of understanding these documents to plan for profitability and manage business finances effectively. Practical examples, like a stapler manufacturing company, are used to illustrate key points. Tiffany also shares personal experiences and offers a free guide for beginners to further grasp financial statements.

00:00 Introduction to the Energetic CFO Podcast
00:42 Understanding Financial Statements
02:50 Income Statement Breakdown
06:40 Balance Sheet Essentials
08:20 Cash Flow Statement Insights
11:01 Practical Financial Tips and Trends
13:51 Conclusion and Next Steps

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Transcript

0:03

Welcome to the energetic CFO podcast, where we empower you to take control of your financial future. I'm your host, Tiffany, an advocate for financial literacy and business success. In this podcast, we'll explore a wide range of financial topics from money mindset and budgeting to building wealth and achieving financial freedom. We'll break down complex financial concepts into simple, actionable steps so you can apply them in your own life. Whether you're a new entrepreneur or a seasoned business owner, this podcast is for you. Join me as we dive into the world of finance and discover the tools and strategies to help you achieve your financial goals. Let's get started! Do you understand the language of money? Have you ever looked at a financial statement and just scratched your head saying, okay, great, I have the numbers, but now what the heck do I do with it? In this episode, I'm going to break down the complex world of financial statements into simple terms so you can learn how to read and interpret these documents to make better financial decisions in your business. Get ready to unlock the secrets of financial literacy and take control of your financial future. I just want you to know starting out that Not reviewing your financial statements is literally killing your business because if you don't know your numbers and what's happening, you have no way to know, are you going to be profitable or profitable enough? Like profit is not something we hope and pray for. It is something we strategically plan for. And I personally, I know like I have made investments in courses and memberships and masterminds without a strategic plan. And it led to me having depleted profit. And all of it has worked out in the end. Don't get me wrong, but I have paid for things that I shouldn't have. And especially early on in our business we tried to shortcut as much as we could through education. And sometimes it wasn't the right education. And it wasn't anything wrong with the programs we did. It just wasn't for what we needed in that moment. I thought, you know, pay for this and it'll solve all my problems. And it just didn't because that wasn't the true problem in the business. Once I got really clear on that and created a plan and a budget for that particular line item, it really helped us reach that next level financially in our business. And now we have so much clarity and ability to know what we should be spending. on things like the courses and memberships and really any expense on RP& L. And it's helped us get really clear on how close we are to reaching our goals and that next level in our life personally. So if you've ever felt overwhelmed by all the financial jargon, then this episode's for you. We're going to dig deep and look at an overview of the financial statements, then dig into the three core statements. And really get a clear picture on what the heck you're looking at when someone sends you a P& L or you generate one for your accountant. So to start, what are the three main financial statements? We have the income statement or the P& L, we have the balance sheet, and we have the cash flow statement. All of them talk to each other and it can get confusing at times. I mean, honestly, at times it still gets confusing for me. If I didn't have my spreadsheets, I'd go crazy. There, there are things on the income statement that, let me phrase it this way. There are things on the balance sheet that you would think should be on the income statement, but they're not. So for example, let's say you have a loan and you make a payment on that loan. That's a portion of its interest, a portion of its principal. The interest is going to show up as an expense on your income statement. The principal amount is going to show up on your balance sheet as a reduction in the loan amount. And. When you're trying to get a clear picture of what's happening in your business from a cash management perspective, that's where the cashflow statement comes in because you can see that whole comprehensive picture. Yeah, I mean, it can get confusing, so let's just get into it and start from the beginning. So the income statement that is revenue and expenses. You're going to have all the money coming in and that's going to give you your gross income. Then you're going to take out. Your cost of goods or services. So that is anything directly tied to the production of that thing that's generating money in your business. So for example I have a stapler in front of me. So when we buy the stapler production company, let's say it's a 10 stapler, hopefully it's not, but just for math sake, let's say it's a 10 stapler and it costs them 2 to make it. And that's all the parts and assembly and everything. So their cost of goods is 2. and their gross profit margin would be seven. So the 10, oh, I'm sorry, eight, cannot math today. So it would be the 10 minus the 2 to create it. They have 8 left to cover overhead and pay for their profit. So that is the high level of the top of the P& L statement. So our gross profit margin is going to be that gross profit number, that 8 as a percentage of the revenue. So 80 percent in this example. If you're, let's say you're selling an online course, it would be anything directly tied to making that course happen. So I think it's a little bit easier with a good that's being sold to understand this concept. So we're going to stick with that example, but this applies to any business. So after they've paid for making the stapler, They still have other business expenses, right? They have the advertising for it, the, all the other people in the corporate office that are helping to facilitate running the business. They have, let's say, some transportation to make sure that it's, you know, getting where it needs to be. And like all of the things that go into running the overhead is generally considered the operating expense. If they're paying a CPA, that would come out of operating expense and the overhead. We have our money coming in. We take out the cost for directly producing it. That's your cost of goods or services sold. And then we take out our operating expense. And what's left is our net profit. And to calculate our net profit margin, we're going to take a percentage of the revenue on that net profit margin. In our example, We have a 10 stapler. We take out 2 to produce it. That leaves us with 8 for our gross profit. And then, let's say we spend 5 in overhead for advertising and salaries and all the things. We now have 3 left in profit. So that's a 30 percent profit margin. That's pretty dang good, especially for a goods and service, or a company selling a good. You want to make sure that your profit margins are in line with industry standard, because if you're paying too much to produce the stapler or whatever it is you're selling, there's not going to be a strong chance that you're going to make the profit that you need to or want to. So having a clear understanding of where these numbers align with industry standards will help you be successful. So that's the income statement. Next we have the balance sheet. I like to think of this as the things and stuff. So your assets. What you owe, that's your liabilities, and what you own, that's your equity. Assets. Those are the things that you, that are in your business. Real estate's an easy one to explain. Our assets are the houses, our liabilities would be the debt that we have on the house, and then the equity is what's left. Let's say we have a 300, 000 house, we have a 200, 000 loan on it, That's 300, 000 in assets, 200, 000 in liabilities, and 100, 000 in equity. This is something that comes in a lot for companies that hold physical assets. If you're a service based company that doesn't have a brick and mortar or a lot of inventory the balance sheet is not as imperative, just being honest. So I personally like to help clients focus on understanding the P& L first because that's really the fundamentals and then we use a cash flow projection sheet that pulls in balance sheet items. So if you're paying yourself distributions, that's not going to show up on your P& L, but we want to make sure we're looking at it in the whole picture. So we pull it in on our spreadsheets and it's just a little bit easier way to look at it. So the balance sheet's really critical for companies that hold a lot of assets, debt, or, you know, have a lot of equity in them. It's something that you look at in a point in time as well. Your income statement, you're going to pull for, let's say a year, and you'll look at 12 months of revenue and expenses. The balance sheet you just pull for a day. So it's what was currently in the account in the assets and the liabilities as of December 31st, for example. And then next we have our cash flow statement. So that is going to represent all the inflows and outflows from a cash perspective in your business. It's broken up into three main categories, operating, investing, and financing. So our operating activities, these are the core things that run your business, your operations. It's buying and selling the goods or services and it's your day to day expenses. That is like the core of the business. Then we have investing activities. These are the things that we use to buy long term assets or invest in other companies. So think of it in our real estate business, you know, taking in the rent, paying our mortgages. Paying for repairs. That's all operating activities. Investing would be, let's say, we give a loan to somebody else. Or we buy a new property. That would be an investing activity. And then finally, financing activities. So this is raising money through debt or equity, or repaying that debt in equity, or if you're paying out shareholders and paying owner distributions that would show up in financing. So in our real estate, let's say we buy a house for 300, 000, that would be an investing cash outflow. But if we got that 200, 000 loan, that would show as an inflow under financing activities. Again, this is one of those statements that's a little bit deeper dive and it's definitely important, but as you're starting to learn this stuff, I really like to have people focus on the P& L because that's where the meat of the things are happening. And as I said before, we pull in the pieces from the balance sheet to our, in our financial analysis so that you're looking at a comprehensive picture and get, in essence, what you're getting on a cash flow statement, but in a little bit easier to understand way. A cash flow statement has calculated off the PNL and the balance sheet, and it's going to show, you know, what the change in cash is for that line item. So for example, if we bought and sold a house in the same year or in the same period we're looking in this cashflow statement, it's going to show the total net value of that transaction or of the two transactions. So it can get a little confusing looking at them. And it's one of those things that I think is more of an advanced topic. So personally, I like to just pull in the cash components of the balance sheet into the P& L. So like we talked about before, if you have debt service, we want to make sure we're including that in our projections because it is true cash going out. But in the cash flow statement, that would be split into two different categories. And it's just, it can get confusing. I know this has been a lot of information and a little bit of time. So if you have questions, please reach out. I want to explain this. In a very deep way, but it's interesting. Cause it's yes, it's important to know all of this, but the reality is if you can get a solid grasp on the PNL side of things and what's coming in from sales, what's going on in expenses, pulling in those other items that aren't showing on your PNL that show up on the balance sheet, it can just, that is the starting point, like that is step one. And I don't want you to be intimidated by all three of these statements because. For most small businesses, the other two, the balance sheet and the cash flow statement are not going to drive as much value. Like I'm big on the 80 20 rule. So if we can get 80 percent of the results by just looking at the 20 percent of the effort, because frankly the P& L is a lot easier to understand, that's where I'd rather you spend your time. So it's important to look at all of these statements and to know what the trends are. So if you notice that, you know, revenue's going down, that's really important to notice. If you notice on, if you look at your cash flow statement and you see your cash flow from operations is negative, that's a big red flag because that means that your business is using debt or equity or something else to fund it. And I've seen that before and it's something that it takes some time to right that ship. So you want to really focus on, are the numbers where you want them to be? Are you making enough? Are you able to take home enough? And if you're not reducing expenses, increasing revenue, whatever it takes, there's a couple levers you can pull there. And then next is following the trends. If you see that your expenses are creeping up faster than your revenue is growing, or you're not making enough income, that's where you want to focus. So in our financial forecast we have a lot of charts to make it easy to visualize. If revenue is, you know, dipping down a little bit, we want to catch that as soon as possible. And that's where not leveraging these statements is killing your business. Because if you don't see the trend before, it's. They give the example of, first, you know, God throws the pebble, then he throws the rock, then he throws the boulder. With your business, if you can catch the pebble, it's easier to right the ship than when they throw the boulder at you. I want to help you do that. If you are interested in learning a little bit more, I have a free guide, Understanding Your Financial Statements. It's just a beginner's guide, step by step through these a little bit more in detail. And personally, I'm a visual learner, so seeing it in real life helps me. So if that's something you're interested in, check the show notes. There's a download link there. And you know, what about this was clear to you? What was confusing? I know there's so much to it and it can be overwhelming at times. So please feel free to reach out to me. The link in the show note for the email is there, it's hello at energeticcfo. com. Let me know what questions you have and maybe we can talk a little bit more in depth about it. In the next episode, we're going to dive deep into the world of debt and explore what's good debt and bad debt. One of my favorite topics, so really excited. Remember, small steps, big rewards. Your future self will Thanks for joining me on this episode of the Energetic CFO Podcast. Remember, small steps can lead to massive rewards. By taking action, staying disciplined, and seeking knowledge, you can achieve your financial dreams. If you enjoyed this episode, please be sure to share, like, and subscribe. And don't forget to leave a comment with your thoughts and questions. Until next time, keep learning, keep growing, and keep thriving.