[MUSIC] Okay, we're going to kick things off with a subject that a lot of people find to be annoyingly boring. I have to say that I used to feel the same way. The funny thing with financial statements is that I think it's a topic that most people ignore only because they've not found a way to relate the importance of the topic back to their own personal lives. What I mean by that is that unless you're working with numbers as part of your day job, it can be a very dry topic to cover and a lot of people are intimidated by it. Don't worry, our goal in this module is not to make you an expert in the topic matter, but rather to cover the importance of understanding financial documents, and how they help start your business on solid footing. Not surprisingly this subject matter becomes infinitely more interesting when it's your own money on the line. Let's kick things off with a brief overview of why understanding your company financials is critical to building a solid business structure. First and foremost, having accurate financial statements will allow you to make informed decisions about what activities are successful and which ones are not. The only way you can determine whether an investment is paying off is if you have the means to measure. Two, this sounds really silly, but if you don't make money you're not going to last long in business. Keep in mind that most businesses will operate at a loss in the first year or two. But the key is being able to utilize your strong financial record keeping to determine that you're making progress towards break even, and ultimately profit. Lastly, cash is king. A lot of people don't realize that fully understanding cash flow is in many ways the most important activity you can do as a small business owner. At the end of the day, if you don't have cash, you don't have a business. In fact, a company could technically be profitable and still go out of business for this very fact. We'll dive into that topic later in the module. A few quick words of wisdom from someone who has screwed this up before, me. Number one start using bookkeeping or financial software right away. Sometimes entrepreneurs try to cut corners on this item and go with the Excel file or notebook route right out the gate. Although I'm all for trying to conserve valuable resources, believe me, this is not an area to save a few bucks. It'll cost you more later on. Find good software and being dedicated is important right out of the gate. Two, some things are best left professionals. Make sure to find a trusted CPA to ensure that you're always in compliance and so that you have someone to guide you along in the decision making processes of starting up your business. Universally speaking tax codes are not simple to understand and having a pro on your team is very important. Once again don't save a buck here. Three, develop great habits. Although certainly not glamorous, financial management is very important to ensure that you're developing a sound business. Just like flossing or working out, you need to develop financial housekeeping to become a habit. Set aside the time to record receipts and purchase orders and conduct inventory counts. You need to make financial management second nature to your business. The topic matter in this module is all tied back to the three main financial statements. These are the income statement, often called a P and L or profit and loss statement, the balance sheet, and the statement of cash flows. Each one of these has their own role to play in financial analysis. And when used in partnership with one another provide you, the business owner, with powerful insights into your business. We'll spend an entire lesson with each one of these statements. But now is a good time to introduce you to the underlying premise of each. The income statement is often represented by the equation, revenues less expenses equal income, or if you prefer, income could be profit or loss. This is the most fundamental of all the statements to understand and is the basis for the development of financial projections. Quite simply the statement reflects the amount of money made less the amount of money spent. Obviously there are a lot more subtleties that we will cover in later lessons but this is the basic premise. Next is the balance sheet, which is often referred to as a snapshot of the current status of a company at a particular moment in time. It is represented by the equation assets are equal liabilities plus shareholder's equity. We'll spend time defining these terms in later lessons, but at this point it's often helpful to think of assets as items that make a company money. These items, physical or otherwise, are paid for or financed by either liabilities or equity from owners in the company. Last but often considered the most important is the statement of cash flows. Quite simply, this statement tracks the inflow and outflow of cash in your company. This is often hard for many first time business owners to understand because we live in a very rapid transaction oriented economy where money is exchanged for goods and services but often occurs simultaneously. You must remove your consumer goggles and realize that the underlying flow of cash that allows you to make these on demand purchases is much more complex. We'll dive into the details of this reality in a dedicated lesson. In this module, our lesson will cover the following. The key terminology and basic structure of all three financial statements, the income statement, balance sheet, and statement of cash flows, as well as development or proforma financial statements. There's a lot of information to cover and certainly each of these topics could be a course onto itself. Our goal is not to make you an expert but rather to empower you with the basic information necessary to create your dream business. Let's get started and dive into the basics of the income statement. >> [MUSIC]
