Understanding The Language of Financial Statements

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What the heck kind of advice are business owners even getting these days? Well, we're here with my good friend Henry Wong. We're going to unpack a recent example that came across his desk with an individual that he was able to help with a dental practice. We're going to talk through that and we're also going to talk about just the importance of understanding and unpacking your financial statements. Financial, financial statements are often these mysterious documents with lots of numbers and lots of little footnotes that aren't always perfectly clear to relate what's really going on in the business. And so we're going to unpack that a little bit with Henry, keep an eye on some of the core elements we need to be aware of. And we might even use a sample business, you know, running some inventory through, through suppliers etc, to kind of discuss that as we go. But let's, let's begin, Henry, with unpacking the situation that occurred with this gentleman who runs a dental practice. I think it's a great place for us to isolate the value of having the right team of professionals around your business operation as you begin to grow and scale.

Yeah, definitely. Thanks, Richard. This is going to be really exciting to go through. So the main thing I just want to first talk about is the medium of what we're going to go through and then we'll revisit, revisit some of the components for business owners as we go through it. So the important thing that business owners, especially incorporated ones, what they will have is financial statements. And the challenge is with this particular dentist that I've been working with related to the financial statements and what they receive, the type of guidance that they would get from the conversation is usually something related to what you could already receive and read from the face of it. And what I want to highlight today is diving into financial statements. And first, recognizing financial statements are basically allowed language. And not every financial professional, including those with designations and licenses, are not proficient in that language. And then once you have that language of that information that's in front of you, there's another component that I would layer into it, which is called the analysis of financial statements. And that's actually a skill and skills take time to become proficient in. There's diversity in the skills and the differences vary from things like industry and size. And I'll use a couple of examples. So someone who's like a dentist or an IT consultant with financial statements who's bringing in $500,000 annually is going to encounter different challenges from same IT consultant or same dental professional with financial statements who's bringing in $3 million annually. And just a nuance of that difference includes things like the tax codes that are going to impact them and the level of wealth that they're at is also different. And of course now if I shift it to industries, the obvious financial statements, differences between a business model that is like a SaaS or software as a service business is going to be drastically different from those and also ones that are like an E commerce business. So what's really what we're going to dive into is kind of empowering you to improve your language as it relates to financial statements and at the same time know what to look for. And at the same time I kind of want to have everyone who's listening to this, especially if you're a business owner, to go over the kind of relationship you have with your financial professional to get more out of that relationship.

It's important to find ways to. Again, everyone wants to get value out of a relationship regardless of what relationship you have in your life. And for a lot of us, where we keep and maintain people around us for the relationships and the value they provide, sometimes that value is camaraderie and friendship and you know, a number of other kind of intangible items. But in the space of, you know, financial professionals around you, we're really talking more about what are some of the tangible elements the intangibles do truly matter. I mean, you want to work with people you want to work with and you want to have a great working relationship, but you also want to make sure that you're getting the value of the appropriate, let's call it advice, coaching, mentorship, understanding and I really think awareness. A business owner to be able to make solid decisions as they look to grow, increase the business, hire staff, think about market adjustments, etc. They want to make sure they're surrounded by people who can have, they can have those conversations with and, and feel confidence in the level of conversations that they're having. And I think we'll kind of tie into some of that as we go through your story here.

Yeah, and you know, I just want to preface the overall framework. A business owner is usually no, is not a stranger for hard work and dedication. And they're putting their blood, sweat and tears and energy into and you know, people hear it as a business but what I kind of want to shift the thought process around it is it's really an asset. You're, you're putting your equity, your sweat, blood and tears into this, your sacrifices. So you're ultimately building this asset and you're relying on this asset as part of your wealth building journey and to serve you once you transition out of this active building working accumulation phase of your life. So you're working on the business or you're working in the business no matter what, despite your best efforts. The first thing just to really highlight is there's a misalignment in terms of the mechanisms that exist today in the systems and what we have. And for example, like our progressive tax system, if you're not careful in how you position things for yourself, if you're using the incorrect components of the tax code, then you can end up paying more taxes than what you're not wanting to pay. And then there's also other components as the more income you earn, the more taxes you're paying. So how can you better position your asset and your efforts so that you're properly taking care of the financial mechanisms in society? And then there's other components like profiteering from the commercial banks and also lastly just pretty much other financial predators. So just kind of want to place that kind of on the landscape for everyone to listen to on that and how I'm coming from the approach.

I think it's funny that it's called progressive tax system. Like it sounds such, like it's such a modern and popular way of looking at things. You know, the reality is it's that the tax you pay progressively increases as you raise your income. But it, it's when you say progressive tax like it sounds like it's supposed to be good for you, you know, you know, but it's not.

Yeah, for sure. And, but it is progressive because the more you make, the more they take. So it definitely works from that vantage point. Now, now that you kind of understand the context of where I'm coming from, the next thing is now saying, well, as your business and as you are building this asset and the wealth part of your components to wealth to it, you're going to surround yourself with a professional or a team of professionals. And the point I want to highlight here is that, you know, I'm just going to use my own experience and being a financial professional for over 20, 20 years and a variety of experience and it's not doing the same thing. In the 20 to 20 plus years I had differing roles and everything that I built my career around and the skills that I've attained towards it. And so I'm just going to use this example related to big companies. So I worked with a big company, I worked for several big Companies too. And there's different layers to financial professionals and I'll just kind of unpack those layers. And the reason why I'm using a big company is because a big company will demonstrate that they have the ability to have the resources. And then you're going to look at, I don't want you to look at it to think that this isn't something you're able to do because it's fully available. It's just how you're able to build the relationship with the professional you have and is it with the right relationship of that professional. So let me use this example here. On a big company there is an executive role, let's say, and it's usually called a chief financial officer or cfo. And their role to the business is to be the strategic right hand partner to the CEO. So if you imagine yourself as the CEO, do you have that right hand next to you? And usually now in their job is to support capital raising or structure the corporations. And you know, in my past career when I was a cfo, I've dealt with mergers and acquisitions, raising debt capital from banks or public or private share insurance or even private equity. So they are usually focused on raising the value of the business and building out that financial pillar of the business. Then you have the second component which is the management or director role. And that's where there's financial planning and analysis. And this particular role builds what's called financial models for the business. And these models usually position where the company is today and where the company wants to be, which, you know, companies will usually set up a mission or have a vivid vision or something along those lines. Well, you've got to have a model of an architecture and how you would actually achieve that financially. And this includes things like budgets, forecasts, projects, projections and assumptions. So that's kind of that particular role is to help move the business or the executives to help lead the company to that vision or that mission. And then there's the controller. And this controller usually captures the actual so what has revenues actually been for the month compared to what was the budget? And then they're going to recognize gaps and weaknesses in the mechanics of the business. And from there they're going to identify process breakdowns or components related to, let's say training of staff, team management, where there's gaps in those processes to make sure that it isn't leakages that are preventing the businesses from achieving that budget and projection. And then the last role is related to what's kind of like an accountant or a bookkeeper who compiles and, sorry, who compiles the financial data into useful formats like the financial statements. So if you're kind of looking at it from this vantage point, a very well resourced big company is looking at all of these dimensions to move their companies to that. So even though, despite where your business journey is as a business owner, it shouldn't mean that you don't have this capability in place, whether it's with a person, but what can be supplemented with the right relationship or with the right education and knowledge. And that's kind of where I wanted to kind of position that for everyone today.