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59One can understand the story of each business through its numbers. This chapter covers how to read the three most important financial statements: the balance sheet, income statement, and cashflow statement. This will help in understanding the financial health and operational success of any organization.
The Balance Sheet - Your Financial Snapshot
The Accounting Equation
Defining Assets
Identifying Liabilities
Calculating Equity
Total Asset Calculation
Finding the Debt
The Startup's Equity
The Income Statement - Tracking Profit & Loss
The Bottom Line
The Top Line
Gross Profit Explained
Operating Expenses
Calculating Net Income
Calculate Gross Profit
Find the Operating Expenses
The Full Calculation
The Cash Flow Statement - Cash is King
The Three Activities
Core Operations
Buying Assets
The Profit Illusion
Net Cash Flow
Core Business Cash
Finding the Financing
The Full Picture
The biggest trap in business is confusing profit on paper with cash in the bank. In this chapter, you will study the distinction between accrual accounting and cash flow, the meaning of “working capital”, and why a profitable company can go bankrupt if it runs out of cash.
The Timing of Money (Accrual vs. Cash)
The Accounting Method
The Cash Method
The Accrual Blind Spot
The Business Standard
Calculating Accrual Revenue
Cash Accounting Month
Accrual Accounting Month
The Profit Gap
The Working Capital Trap
The Cash Traps
The Inventory Trap
The "Good" Trap
Defining Working Capital
Calculate Working Capital
The Restaurant's Cushion
The Danger Zone
Finding the Assets
The Cash Conversion Cycle (Speed Matters)
The Ideal Cycle
The Three Components
The Power of Payables
The Negative Cycle
Calculate the Cycle
The Service Business
The Slow Retailer
Achieving the Negative Cycle
Financial statements provide the data, but ratios provide the true position. This chapter teaches you how to use Key Performance Indicators (KPIs) to measure profitability, liquidity, and overall business efficiency, just like a financial analyst.
Profitability Ratios (How much do we keep?)
The Meaning of Margins
Gross vs. Net
The Great Equalizer
The High-Volume Game
Calculate Net Profit Margin
Calculate Gross Margin
The Tech Startup's Margin
The Global Retailer
Liquidity Ratios (Can we survive tomorrow?)
The Acid Test
The Meaning of Liquidity
Reading the Current Ratio
Identifying Current Liabilities
Calculate the Current Ratio
Calculate the Quick Ratio
The Danger Zone
Finding the Missing Cash
Return on Investment (Is it worth the risk?)
The Investor's Metric
Understanding the Result
Scope of the Metric
Justifying the Expense
Calculate ROI
Calculate the Equipment ROI
Calculate the ROE
A Negative Return
Budgets tell you where you're going, but financial statements tell you where you've been. In this chapter, you'll learn how to turn your business strategy into a financial plan, keep track of your progress with variance analysis, and use break-even math to make smart, risk-free decisions.
The Basics of Budgeting (Planning the Future)
Identifying Costs
Identifying Fixed Costs
The Purpose of a Budget
The Bottom-Up Approach
Calculate Total Expected Costs
Calculate Variable Costs Only
Working Backwards
The Full Forecast
Variance Analysis (Mind the Gap)
Understanding Variances
The Revenue Rule
The Detective Work
Defining the Term
Calculate the Expense Variance
Calculate the Favorable Expense
Calculate the Revenue Variance
Total Department Variance
Break-Even Analysis (When do we make money?)
The Zero Profit Point
The Contribution Margin
Crossing the Line
The Ultimate Tool
Calculate Break-Even Units
Find the Margin
The Bakery's Target
The Big-Ticket Item
Taxes represent a substantial drain on a company’s cash flow, but most non-finance managers do not think about them until year-end. In this final chapter, you will learn about the mechanics of corporate tax, the difference between direct and indirect tax, and how to calculate the true, after-tax value of your business decisions.
Direct vs. Indirect Taxes (Who actually pays?)
The Tax Collector
The Profit Tax
The VAT Trap
The Bottom-Line Impact
Calculate the Invoice Total
The Government's Share
The Final Bill
The Revenue Truth
Accounting Profit vs. Taxable Income
The Two Books
Disallowed Expenses
The Purpose of Differences
Legal vs. Illegal
Calculate the Tax Bill
The Penalty Add-Back
The Green Incentive
The Full Tax Bill
The After-Tax Mindset (Decision Making)
The Silent Partner
Realistic Returns
The Ultimate Bottom Line
Calculate After-Tax Profit
The True Bottom Line
The Realistic ROI