StartingOverNow.com
Articles
Understanding the Financial Reports for Your
Business
No matter where you are in your career, you need to be able to
understand financial reports so that you may plan, ask the right
questions, hedge off disaster and grow. I meet entrepreneurs every
week that believe that passion for their product or service is enough
to succeed. I continually encounter executives who leave the finances
of their organization to an accountant or vice president of finance
without oversight. As is referenced in Michael Gerber’s book “The E-
Myth Revisited: Why Most Small Businesses Don’t Work and What to
Do About It” leaving the finances of your organization to others is the
primary reason that entrepreneurs fail. It is also a reason that
leaders don’t rise to the top – because they’d rather spend time
focused on what they know and love, leaving the foundation of their
operation to chance. I am a fan of concentrating on what you are
good at and surrounding yourself with people who have your
weaknesses as their strengths – but when it comes to finances you
just plain have to understand the basics.
Fiscal Year: A fiscal year is any 12-month period that a company
uses for accounting purposes. It may begin on January 1st. It may
begin on July 1st or any other day of the year and lasts for 12 months.
Balance Sheet: This reflects the assets, liabilities, and the owner’s
equity at a given point in time. Essentially it shows on any given day
what the company owns, owes and how much it is worth. It’s a
snapshot of the business’s value. It always balances: assets =
liabilities + owners’ equity. Owners’ equity = assets – liabilities. All
other financial statements flow to the balance sheet.
Income Statement: An income statement shows revenues,
expenses and profit for a specific period of time – generally a month,
quarter or year. This is often called a profit and loss statement, P&L,
statement of earnings or statement of operations. The word
“consolidated” may be placed in front of these words. The bottom
line of these statements is the net profit of the service line or
business.
Operating Expenses: These are the costs of running your business
or service line on a day to day basis. They include all of your
expenses: salaries, benefits, advertising, insurance, legal fees, and
printing among others. Operating expenses are listed on the income
statement and are subtracted from the revenue to establish profit.
You will compare your budgeted expenses to your actual expenses
monthly to see how your business is performing.
Net Assets: Net assets = the fair market value of the assets of the
organization (investments, fair market value of any land, building or
equipment) less the assumed liabilities – or bills that still need to be
paid.
Cash Flow: most managers focus on profit when they should be
focusing on profit and cash. Factors that affect cash flow are:
Accounts receivable – Are your customers paying their bills on time.
Inventory – Are you stocking too much and selling or moving some
part of that too slowly? Expenses – Do you defer expenses when you
can? Do you consider your cash flow cycle when you purchase
inventory or supplies? Giving credit – Do you give clients too long to
pay their bills? Is it too easy for clients to get credit? Managers who
understand cash flow tend to be given more responsibility.
Intangibles: A company’s intangibles are anything of value that you
can’t touch or spend: employees, customers lists, patents, brand
names, reputation, strategic strengths. They do not show up on the
balance sheet except for copyrights and patents which may be
amortized or paid over its useful life.
Profit: This is what is left over after expenses are subtracted from
revenue. There are three types of profit: gross profit, operating profit
and net profit. Gross profit = sales – cost of goods sold or cost of
services. Operating profit or EBIT (earnings before interest and
taxes) = gross profit – operating expenses. This includes the
overhead of running the business where gross profit just reflects the
income versus the cost of goods or services. Net profit = “the bottom
line” of the income statement. It’s whatever is left after interest
expenses, taxes, one-time charges and any others costs are
subtracted from the operating profit.
Gross Profit Margin = gross profit divided by revenue
Operating Profit Margin = operating profit or EBIT divided by revenue
Net Profit Margin = Net profit divided by revenue
Capital Expenditures and Depreciation: A capital expenditure is
when you purchase a product – a thing – that is considered a long
term investment such as office furniture, computers and other
equipment, vehicles, buildings. Generally a threshold dollar amount
is set so that any purchase over that amount automatically becomes
a capital investment (can be $500, $1,000, $5,000 etc.) while
anything less is an operating expense. Operating expenses show up
on the income statement and therefore reduce profit. Capital
expenses show up on the balance sheet. Only a depreciated amount
of a piece of capital, a portion of its cost, appears on the income
statement rather than the entire purchase being subtracted in one
month because that could falsely represent that large expense the
company or businesses is doing poorly. By the end of the year it will
balance out. The depreciation is accrued, or spread over, the
estimated life of the product and is referred to as a noncash expense.
Accruals: An accrual is a portion of a given revenue or expense line
item that is recorded across a particular time span instead of in the
month it occurs. For instance, you may pay a high software
maintenance fee once a year. Instead of reporting that expense in the
month the bill is paid, an equal portion of it may be spread out or
accrued over a particular time period – often your 12 month budget
cycle. The reason for this is to match revenue to costs in a given
reporting period – so that at any given time your business does not
appear to be in the red when you know it will even out at the end of
the year.
If you understand these very basic accounting principles you will
better be able to track the deficits and opportunities in your business.
Simple accounting software like Quickbooks Pro or Quicken Home
and Business will automatically create these reports for you but the
reports will do you no good if you do not understand them. Start now!
Sign up for Mary Lee’s Free Coaching e-newsletter. Email this link
to a friend.
Get Mary Lee’s tips on "Goals - Four Goal Setting Strategies that
Rock" and other free resources at Articles and Tip Sheets.
Mary Lee Gannon is the president of StartingOverNow.com -
Transforming People and Organizations with a Goals-to-Results
Strategy. With more than 16 years of experience as a CEO of
organizations with up to $26 million in assets, Mary Lee consults with
businesses on strategy. She is a graduate of The Duquesne
University Professional Coaching Program and an alumnus of the
2010 Harvard Medical School and McLean Hospital Coaching in
Medicine & Leadership Conference. Her personal turnaround came
as a stay-at-home mother with four children under seven-years-old
who endured a divorce that took she and the children from the
country club life to public assistance from where she earned success
to support her family. Services: Management Consulting /
Workshops, Meeting Facilitation, Coaching, Webinars, and
Speaking. Areas of Specialty: Strategic Planning / Board
Development / Healthcare / Public Relations / Goal Setting / Meeting
Facilitation / Accountability / Leadership / Time Management /
Life/Career Transition. Her book "Starting Over - 25 Rules for When
You've Bottomed Out" is available in bookstores and from online
booksellers. Sign up for Mary Lee’s Free Executive Coaching e-
newsletter
Business
No matter where you are in your career, you need to be able to
understand financial reports so that you may plan, ask the right
questions, hedge off disaster and grow. I meet entrepreneurs every
week that believe that passion for their product or service is enough
to succeed. I continually encounter executives who leave the finances
of their organization to an accountant or vice president of finance
without oversight. As is referenced in Michael Gerber’s book “The E-
Myth Revisited: Why Most Small Businesses Don’t Work and What to
Do About It” leaving the finances of your organization to others is the
primary reason that entrepreneurs fail. It is also a reason that
leaders don’t rise to the top – because they’d rather spend time
focused on what they know and love, leaving the foundation of their
operation to chance. I am a fan of concentrating on what you are
good at and surrounding yourself with people who have your
weaknesses as their strengths – but when it comes to finances you
just plain have to understand the basics.
Fiscal Year: A fiscal year is any 12-month period that a company
uses for accounting purposes. It may begin on January 1st. It may
begin on July 1st or any other day of the year and lasts for 12 months.
Balance Sheet: This reflects the assets, liabilities, and the owner’s
equity at a given point in time. Essentially it shows on any given day
what the company owns, owes and how much it is worth. It’s a
snapshot of the business’s value. It always balances: assets =
liabilities + owners’ equity. Owners’ equity = assets – liabilities. All
other financial statements flow to the balance sheet.
Income Statement: An income statement shows revenues,
expenses and profit for a specific period of time – generally a month,
quarter or year. This is often called a profit and loss statement, P&L,
statement of earnings or statement of operations. The word
“consolidated” may be placed in front of these words. The bottom
line of these statements is the net profit of the service line or
business.
Operating Expenses: These are the costs of running your business
or service line on a day to day basis. They include all of your
expenses: salaries, benefits, advertising, insurance, legal fees, and
printing among others. Operating expenses are listed on the income
statement and are subtracted from the revenue to establish profit.
You will compare your budgeted expenses to your actual expenses
monthly to see how your business is performing.
Net Assets: Net assets = the fair market value of the assets of the
organization (investments, fair market value of any land, building or
equipment) less the assumed liabilities – or bills that still need to be
paid.
Cash Flow: most managers focus on profit when they should be
focusing on profit and cash. Factors that affect cash flow are:
Accounts receivable – Are your customers paying their bills on time.
Inventory – Are you stocking too much and selling or moving some
part of that too slowly? Expenses – Do you defer expenses when you
can? Do you consider your cash flow cycle when you purchase
inventory or supplies? Giving credit – Do you give clients too long to
pay their bills? Is it too easy for clients to get credit? Managers who
understand cash flow tend to be given more responsibility.
Intangibles: A company’s intangibles are anything of value that you
can’t touch or spend: employees, customers lists, patents, brand
names, reputation, strategic strengths. They do not show up on the
balance sheet except for copyrights and patents which may be
amortized or paid over its useful life.
Profit: This is what is left over after expenses are subtracted from
revenue. There are three types of profit: gross profit, operating profit
and net profit. Gross profit = sales – cost of goods sold or cost of
services. Operating profit or EBIT (earnings before interest and
taxes) = gross profit – operating expenses. This includes the
overhead of running the business where gross profit just reflects the
income versus the cost of goods or services. Net profit = “the bottom
line” of the income statement. It’s whatever is left after interest
expenses, taxes, one-time charges and any others costs are
subtracted from the operating profit.
Gross Profit Margin = gross profit divided by revenue
Operating Profit Margin = operating profit or EBIT divided by revenue
Net Profit Margin = Net profit divided by revenue
Capital Expenditures and Depreciation: A capital expenditure is
when you purchase a product – a thing – that is considered a long
term investment such as office furniture, computers and other
equipment, vehicles, buildings. Generally a threshold dollar amount
is set so that any purchase over that amount automatically becomes
a capital investment (can be $500, $1,000, $5,000 etc.) while
anything less is an operating expense. Operating expenses show up
on the income statement and therefore reduce profit. Capital
expenses show up on the balance sheet. Only a depreciated amount
of a piece of capital, a portion of its cost, appears on the income
statement rather than the entire purchase being subtracted in one
month because that could falsely represent that large expense the
company or businesses is doing poorly. By the end of the year it will
balance out. The depreciation is accrued, or spread over, the
estimated life of the product and is referred to as a noncash expense.
Accruals: An accrual is a portion of a given revenue or expense line
item that is recorded across a particular time span instead of in the
month it occurs. For instance, you may pay a high software
maintenance fee once a year. Instead of reporting that expense in the
month the bill is paid, an equal portion of it may be spread out or
accrued over a particular time period – often your 12 month budget
cycle. The reason for this is to match revenue to costs in a given
reporting period – so that at any given time your business does not
appear to be in the red when you know it will even out at the end of
the year.
If you understand these very basic accounting principles you will
better be able to track the deficits and opportunities in your business.
Simple accounting software like Quickbooks Pro or Quicken Home
and Business will automatically create these reports for you but the
reports will do you no good if you do not understand them. Start now!
Sign up for Mary Lee’s Free Coaching e-newsletter. Email this link
to a friend.
Get Mary Lee’s tips on "Goals - Four Goal Setting Strategies that
Rock" and other free resources at Articles and Tip Sheets.
Mary Lee Gannon is the president of StartingOverNow.com -
Transforming People and Organizations with a Goals-to-Results
Strategy. With more than 16 years of experience as a CEO of
organizations with up to $26 million in assets, Mary Lee consults with
businesses on strategy. She is a graduate of The Duquesne
University Professional Coaching Program and an alumnus of the
2010 Harvard Medical School and McLean Hospital Coaching in
Medicine & Leadership Conference. Her personal turnaround came
as a stay-at-home mother with four children under seven-years-old
who endured a divorce that took she and the children from the
country club life to public assistance from where she earned success
to support her family. Services: Management Consulting /
Workshops, Meeting Facilitation, Coaching, Webinars, and
Speaking. Areas of Specialty: Strategic Planning / Board
Development / Healthcare / Public Relations / Goal Setting / Meeting
Facilitation / Accountability / Leadership / Time Management /
Life/Career Transition. Her book "Starting Over - 25 Rules for When
You've Bottomed Out" is available in bookstores and from online
booksellers. Sign up for Mary Lee’s Free Executive Coaching e-
newsletter
StartingOverNow.com
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Mary Lee Gannon's
Book "Starting Over" is
available in bookstores
or online booksellers
Amazon.com - 5 Stars!
Book "Starting Over" is
available in bookstores
or online booksellers
Amazon.com - 5 Stars!
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