Bob Gauvreau (YouTube, Jul 20, 2023) gives a concise tutorial on the four core financial statements: the balance sheet (a snapshot of assets and liabilities at a moment in time), the profit & loss / income statement (revenues and expenses over a period), the statement of cash flows (reconciling accounting profit to actual cash movements), and the statement of retained earnings/owner's equity (opening equity plus net income minus owner distributions). He emphasizes comparing P&L across months to spot trends, and reviewing recurring overheads (e.g., subscriptions) to cut waste.
Chapters
Okay, let's talk about how to understand financial statements and really what they are. So financial statements are essentially a package of different reports that are typically accountant prepared. It can be inside Your, let's say QuickBooks Online or your bookkeeping software. The reports include a few balance sheet. The balance sheet shows you your assets and liabilities as of a certain date. So for example, it's not a period, it's as of a certain date. So you can do it as of today, you can do it as of last year, you could do it as of last week. It's a picture, a snapshot of a period of time right at that moment. So it's not over a period, it's at that moment. The next report would be the profit and loss. So the statement of income, however you want to refer to it, that's over a period of time. And that looks at all of the revenue and expenses that come into play during that period. So you can say that period is a week, you could say it's a month, you could say it's a quarter, you could say it's a year, you could say it's 10 years. Whatever that period, it's going to report revenue and expenses over that period of time. So one thing that we like to do is change the periods and compare different periods to other periods to see how the business is progressing. The third main one that we really love and not all accountants include it, but I think it's the most important one altogether, is a statement of cash flows. So the statement of cash flows looks at essentially your income that's being reported on a profit and loss and says, okay, that's great, but what are the changes that have impacted how your cash comes in? So, for example, you earn $100,000 in net income. You might have zero cash that comes into your business. How do we reconcile, how do we look at that $100,000 profit and come up with how much cash is in your bank? So it's really a reconciliation of here's your profit, here's your cash, what is impacted it along the way. And then the last one not including notes or disclosures would be the statement of retained earnings, statement of equity, statement of partnership equity, statement of owner's equity, whatever the business structure is, it looks at what was the income expenses that were essentially from the, you know, the opening amount, add revenue and expenses from that period of time. And then how much owners distributions did we take out? So is it drawings, is it partnership distributions, is it dividends? Whatever it is, we start with an opening At a period of time, we add in the income, so the revenue minus expenses in one line, which is net income. And then we take out any owner distributions. And that shows us the net equity that we have as of the end of a period of time. So again, it's over a period of time as well, just like the income statement is. So part of the reason that financial statements are important is that it gives you a really good oversight as to what's happening in your business, whether it's as of a certain date or whether it's over a period of time. The value that's inside these reports will give you a dashboard and an understanding of where you're at inside your business. One of our favorite reports, or one of my favorite reports, I should say, is looking at a profit and loss statement over a period of time. Let's say it's 12 months. And I like to look at it with monthly categories. So for example, if it's, if it's for January to December, I like every month outlined individually. Why? Because when I look at it this way, I can see a comparison of every single month that's happened during this period. I can see progress that's been made. Has our revenue gone up? Have our expenses gone up? So I look at that report and I say, here's an analysis of things that I can see are happening, whether it's good or it's bad. And if it's good, how can we recreate that? Or how can we take the learnings from that period of time and duplicate it or make it even better? And then during a period where it's not so great, how do we make sure that we eliminate any of the behaviors or patterns that happen in that period so that they don't happen again? We focus on the good, we eliminate the bad. This also gives me a really good indication of what I need to do in my business next. Now, the other piece I really like about this report is that I can go through and I can look at my overhead expenses, my fixed expenses on a month to month, and I can identify where expenses have gone up. A really great area is to look at your dues and subscriptions, like your software, and go through them on a monthly basis and you'll watch they'll continuously go up. And as they're going up, if you look at the specifics of details, I bet you at the end of that period, if you're looking at the details, you're probably still paying for software or a membership that you're not even using. So look at that period. Eliminate it. It'll save you a whole bunch of money. Again, these financial statements are a package of different reports showing statement as of assets and liabilities as of a certain date and revenue and expenses over a period of time. The better you understand how these financial statements work, the more insights you'll get into your business and the more these insights will set you up for future success.
