This is Barry mould still getting small business thought. Today we're going to talk about how to read your financial statements because if you can't interpret them, you truly are stuck. You're afraid to look at them you don't know what they mean. And the worst part is, you're afraid to ask for help. You're afraid that when the CPA explains to you, you don't really know what they're talking about. Let's talk about the three basic statements that you should understand how to read.

The first one is the profit and loss statement. Now, the way the profit and loss statement is really laid out is it gives you how much revenue, what your expenses were and what your profit was, over a period of time many people look at on a monthly basis, a quarterly basis and annual basis. The top of the profit and loss statement is the revenue It's your sales. The next line typically is your cost of sales or cost of goods. What is the exact cost related unit for unit to delivering that service or product, you then subtract cost of sales or cost of goods from revenue to get your gross profit. From gross profit, you deduct your other expenses.

These are overhead expenses, some fixed expenses, like rent, or other kinds of services like utilities, or travel or meals, those kinds of things. And then at the bottom, you have your net profit before interest, amortization, depreciation and taxes. What's important to look at is your revenue. How does that revenue change from month to month? And most importantly, how does the gross margin change gross margin is defined as your revenue minus your cost of goods or cost of sales. That's how much money you make on each product.

Or service that you sell. Remember, it's a lot easier to make money at the bottom line. If you have an 80% gross margin than if you have a 20% gross margin, take a look at your expenses and divide them into fixed expenses and variable expenses. fixed expenses are those that don't change from month to month, like your rent. It doesn't matter how many products you sell what your revenue is, your rent is going to be the same from month to month. variable expenses are those that change based on your sales volume or perhaps the time of year.

Look at the various trends and relationships with these two. And what happens as you examine these kinds of things. It's very important to look at a profit and loss statement, both from an accrual basis and a cash basis. And accrual basis means that we recognize revenue when we actually sell the product, regardless of when we collect the money for it. We also recognize the expense when we're built or we sell the product again. regardless of when we actually pay that expense, we should also look at our profit loss statement over what it actually is to what we budgeted to be.

And then perhaps what was it like the same time last year? How do things actually vary? Remember, try to keep your fixed cost as low as possible, and more of your costs as variable as possible. The second major financial statement is of course, the balance sheet, which a lot of people have trouble reading. It's divided into two different areas, you have assets, and then you have liability and owner's equity. Assets really is things that the company owns.

Typically, this is cash. This is accounts receivable, this may be real estate, this may be machinery, this may be any loans that you've given on behalf of the company. The next part of the balance sheet really is the liabilities, this is what you owe. This is trade payables. This loans to the bank. And then the final part is the difference, which is really the owner's equity, or what the book value of the company really is.

When you look at the balance sheet, one of the most important things to do is actually to take what's called a quick ratio is the ability to pay your bills, you take a look at your current assets, which is mostly your cash and accounts receivable and divided by your current liabilities. If it's greater than one, it means that you'd have the cash on hand, Bill, pay your bills. If it's less than one, then technically, you really are insolvent. The key thing is, do you understand every single number on that balance sheet and are some numbers positive when they ought to be negative, and are some numbers negative when they ought to be positive? The final statement that you must review and most small business owners can't read this is the cash flow statement, because this is the only statement that will actually tell you the truth.

This is the source of the cashier business. Now the poor man's cash flow statement is take a look at your bank account. And I hope you know how to access your bank account statement because I know a lot of you don't even look at your bank statement every single month or don't balance it. But that's another video, look at the amount of cash you had at the beginning of the month. And then look at the amount of cash you had at the end of the month. That is the difference is the amount of cash that you gained or lost during the month.

And remember, cash flow is actually King. Now putting together a cash flow statement and this can be pulled from almost any basic accounting program like Sage 50 or QuickBooks, what you can do is you first have your net income for the month or for the period of time you're looking at. And then you add back in depreciation amortization. And then you add the difference in accounts receivable from the previous period. Now I say difference because this is a little bit tricky here when accounts receivable actually goes up. That's a use of cash because that cash is being taken out of your business.

People are paying their bills later, when your accounts receivable goes down, that's actually a source of cash. Alternately, with accounts payable when you're paying your bills later, and accounts payable goes up, that is actually a use of cash. But if you're paying your payables your bill sooner, and it goes down, that is a use of cash. And finally, a lot of cash is used in inventory. When your inventory goes up, that's a use of cash and when your inventory goes down, that's a source of cash. Understanding what uses cash and what's a source of cash will be a way for you to improve the cash flow of your business.

Think about where are you weakest in your business? Do you understand how to read a profit and loss statement? Only 50% of small businesses can can you read a balance sheet? Only 25% of small business can. Can you read the all important cash flow statement? Only five percent of small businesses can think about the one change that you're going to make as you strive for minimal achievement.

This is very old school, getting small business and stuff. Have a great day.