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You only need to know 3 things to understand finance. I could have saved myself: - 2 years for my MBA - $160,000 to pay for it - 7 years at Goldman If I just learned to read these 3 financial statements:
Want to know if a business is a winner to invest in, buy or build? Read & understand: • Income Statement: Revenue - Expenses = Profit • Balance Sheet: Assets = Liabilities + Equity • Statement of Cashflows (SCF): Starting Cash +/- Cash made/spent that period = Ending Cash
1. Income Statement WTF does it do... Reveals if you are profitable. Shows if you are efficient. Tells you how much $$$ you've made
Two types of expenses on your income statement: • Cost of Goods Sold (COGS) = Spend $$ to make $$ • Overhead expenses = fixed or variable costs to run the business (the cost of doing business)
The Income statement will help you determine: • If you are winning • Understand which costs are preventing you from winning • Make better decisions
2. Balance Sheet How healthy is your business? • Do you have cash? For how long? • Can you pay your bills? • Are you in debt & maybe don't even realize it?
Assets are what you own: • Cash • Inventory (unsold product) • Property, equipment or vehicles • Licenses, trademarks or goodwill The goal is to increase the above four buckets. Some take more time than others to fill.
Liabilities are what you owe: • Accounts Payable • Income Tax • Credit Card Debt • Mortgages & other Long-term debt
Equity is what you are worth. What is leftover if you sold off everything & paid off all the debt. Can current assets (your +) cover current liabilities (your -)?
3. Statement of Cashflows How much cash has been grossed or lost over a specific period of time due to: • Financing • Operations • Investments
Cashflow from Financing Raising capital from banks, investors or shareholders: • Capital raised • Dividends Paid • Principal on debt
Cashflow from Operations Using cash for business activities • Rent • Cash from Sales • Income Tax • Employee compensation
Cashflow from Investing Including any company investments such as: • Purchase & sale of assets • Loans made or received • Purchase or sale of machinery or equipment Is cashflow positive or negative? Why? Are operations strong enough without financing or investments?
TL;DR 1Three financial statements do this for you: - Income Statement = Are you profitable? - Balance Sheet = Can you cover liabilities? - Cashflow statement = Is cashflow positive/negative & why? Lots of things in life are complicated biz finances don't have to be.
Pss 2 edits: Supposed to be a 2 not a 7 at Goldman. Zero chance I could have stomached that for longer 😂 Also technically I have a PhD and MBA and I looked up the cost again it was actually $180k. The rest still stands 🙏
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