Understanding Financial Statements

In Financial Accounting or Reporting, the 3 most important financial statements for budding entrepreneurs are:
1. The Statement of Financial Position or the Balance Sheet
2. The Statement of Income or The Profit & Loss Statement
3. The Statement Of Cash Flows.

The Balance Sheet shows the business's assets, the liabilities, and the equities of a business. It is a 'snapshot' of the business economic resources at a certain date. That is why when you see one, it says something like, "The Statement Of Financial Position as at dd/mm/yyyy." Your Balance Sheet shows you what you own and how you acquired them (borrowed from others or contributed by you).

Unlike a Balance Sheet that is a 'snapshot' of economic resources, the Profit and Loss Statement is a summary of the flows of earned revenues and incurred expenses of a business for a period of time. That is why when you see one, it says something like: "Profit & Loss Statement for the year 200X." Your Profit And Loss shows you how much you are expending each period and how much you are earning.

The Statement of Cash Flow summarizes the 'cash' effects of the activities of a business for a period of time. These activities can be operating, investing and financing. The keyword that I would like to emphasize in the above definition is the word 'cash'. It only records activities that involved the transfer of cash. The statement of Cash Flow summarizes the exchange of cash in your operating, investing and financing activities.

For most entrepreneurs, when starting a small business, the attention should be placed on your Profit and Loss statement because that is your record of how much income is coming in and how much expenses is going out. Take a look at the revenue items there to know which activity is bringing in money and take a look at the expense items to see which ones are costing you the most and ask yourself whether those expenses are really necessary.

Are there ways in which you could cut your costs? Costs are what any entrepreneur has to control at the start of every business. No cost item should go by unnoticed or unmonitored. Their existence must be justified. Every dollar counts. Every dollar that gets tied up in one thing is a dollar that could otherwise be used somewhere else

What Would You Do With A Second Chance?

How many times have you said, “If I only knew then what I know now?”

We’ve all wished that we could go back in time with our heads full of knowledge and our belts busting with experience and do it all over again. The proverbial “second chance” is something we’ve all wished for - some of us more than others. Imagine how different our lives would be if we came equipped with unlimited “do overs.”

You could avoid the mistakes you previously made and build on the successes you previously enjoyed. You could nurture the positive relationships and avoid the bad. You could tap into your wealth of experience during times of indecision and always know where and when your time and money would be best spent.

Now apply that question to your business. What would you do if you had the opportunity to build your business all over again, but do so with the wisdom gained from building the business all these past years?

If you could take the knowledge and experience gained from years of running your business, as well as your credibility, good name, and customer list, and start anew from square one what would you do? Oh, and did I mention that you had a nice check to fund it all this time so you won’t have to scrimp and save and bootstrap your way back to the top?

Here’s why I’m posing this question: a few weeks ago a young business here in Huntsville was destroyed by fire. It was a devastating loss for the owners who could do nothing but stand by and watch as years of hard work went up in flames.

The fire destroyed the building, some equipment and inventory. The business was insured and the owners have already vowed to rebuild, which means the fire did not destroy the business itself, only the physical aspects of it.

Brick and mortar and inventory do not a business make. Brick and mortar house the business. Inventory brings the business revenue, but the heart of the business – the spirit and soul and purpose – lives inside the entrepreneur building that business. If the entrepreneur survives and rebuilds, so survives the business.

Starting over can be tough even with an insurance check to fund it all, but I hope these entrepreneurs understand that this is an opportunity to take the lessons learned over the last few years and put them to work for the future. This is a chance to do all the things they always talked about that they should have done differently in the beginning.

So back to the original question: if you could go back and rebuild your business knowing what you know now, with an insurance check to fund it, what would you do differently and what would you do the same?

Let me put it into perspective for you. Imagine building your dream home and living in it for a few years until one day the house is destroyed by fire. A devastating loss, no doubt, but no one is injured and everything is insured.

You now have to make a decision; will you build the exact same house or build a different house that takes into account all the things you wanted to change about the old house.

Maybe after living there for a few years you discovered that you should have put in a downstairs bathroom or added more closet space in the master bedroom. Maybe the kitchen was too small or the laundry room too large. Now you have the chance to rebuild your dream home with all the lessons learned from years of living in the house.

So to these entrepreneurs who are living this experience, I encourage you to keep the faith and keep looking toward the future. I understand that you felt completely helpless watching that fire engulf the building. I know that you are now mourning the business as if you’d lost a close friend. But please, keep in mind that disaster gives rise to opportunity.

Rise from the ashes, become the Phoenix. Rebuild your business into something truly amazing. We’ll all be with you as you do.

Tim Knox
Entrepreneur, Author
"Everything I Know About Business I Learned From My Mama"