We got great feedback on this webinar. Check out the video link and reference materials below… A special thanks to Ghostranch for organizing!
Largest Vocabulary in Hip Hop - this site has some incredible pop culture-related DataViz!
A Little Bit Softer Now: How To Dance To ‘Shout’ Without Ending Up On The Floor
For short attention spans
The niche Spotify playlist especially curated for "Do Data, Better." Enjoy the randomness.
Come join us on November 15th!
What is the most confusing thing for small business owners? For many, it is these important (but confusing) reports from your accounting software: the Income Statement, the Balance Sheet & the Cash Flow Statement.
Brian Feroldi (@BrianFeroldi) has built the best (and possibly the simplest) visual guide I’ve seen. Let’s start small and work on getting a basic understating of each report.
High-level summary of accounting statements from Brian Feroldi. The Cash Flow Statement is highlighted because it’s the most important (but unfortunately, not the most popular).
The most popular financial statement is the Income Statement (which is also called the Profit & Loss Statement). The Income Statement shows your business’s income and expenses over a period of time using accrual accounting.
The Balance Sheet is a summary of what your business owns (assets) and owes (liabilities) at a point in time. It uses cash accounting.
Lastly, the Cash Flow Statement shows the moment of cash over a period of time using cash accounting.
Business owners quickly figure out the difference between the Income Statement and Cash Flow Statement when their bank balances aren’t aligned with their “net income” figures. If I’m making all this profit why don’t I have any cash?
At its core, that Income Statement is trying to show how your company makes money (Net Income) and how your expenses are distributed. The simplest Income Statements will have the following structure (again, I’m using visuals from Brian Feroldi).
The top of this table will always be “Net Revenue” (Total Sales) during the period shown. When folks say “top line revenue” they truly mean the revenue from the top line of your Income Statement. As we move down the Income Statement we subtract expense by expense until we get to Net Income.
The first expense is the Cost of Good Sold (also called the Cost of Sales). The “Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company.” As such manufacturing companies will usually have a much higher COGS than service companies.
Revenue - Cost of Goods Sold = Gross Profit
Gross Profit (also called Gross Income) is the total profit after accounting for the direct costs of selling the goods your business makes, but calling it profit seems misleading because there are still a bunch of very real expenses that your business has to cover.
Gross Profit - Operating Expenses = Operating Income
Operating Expenses are the total expenses required to operate your business (sometimes these are spilt out into categories including selling, general and administrative expenses, research and development expenses, depreciation and amortization, etc). When Operating Expenses are removed from Gross Profit, you have Operating Income (sometimes called EBIT = Earnings Before Interest and Taxes).
Operating Income - Non-Operating Income = Pre-Tax Income
Non-Operating Income is most commonly interest that you pay to someone else or interest that is paid to you (investment income is also recorded here). For most small businesses the difference between Operating Income and Pre-Tax Income is small. A good CFO can significantly enhance Non-Operating Income! Pre-Tax income is also called Earnings Before Tax.
Normalizing your financial metrics helps benchmark your business against your peers. The most common
Half the confusion about these financial statements seems to tie back to understanding the time periods shown. The Balance Sheet shows financials at a point in time (example: December 31, 2023). This defers from the Income Statement and Cash Flow Statements which show financials over a period of time (example: January 1, 2023 - December 31, 2023).
The balance sheet is built on one central equation: Assets = Liabilities + Shareholder Equity. For some people, it’s easier to think of the equation like this: Assets - Liabilities = Shareholder Equity… because if I have $100 but I owe a friend $10 my ‘net worth’ is $90 ($100-$10=$90). In “balance sheet speak” your net worth is your shareholder equity. This formula must be in balance at all times, so anytime your business has a change in assets or liabilities the balance sheet is impacted.
What type of assets and liabilities goes where? Brian’s graphics below will give you examples.
Current assets are assets that are expected to be used in the next 12 months.
Long-term assets are expected to be used for more than 12 months (Buildings, Equipment, Trademarks, Patents, etc.)
Liabilities use the same methodology. Current liabilities are due in less than 12 months and Long-term liabilities are due in more than 12 months.
One great “shortcut” to identify a company’s near-term financial position is the Current Ratio. The Current Ratio = Current Assets / Current Liabilities. A Current Ratio of less than 1 is a challenge… the company has more liabilities than current assets and will likely struggle to pay the bills. But a current ratio of 2 or more? That company has more than double the amount of short-term assets than is required to bill their bills. They are in good shape!
Lastly, Shareholders Equity. For many small to medium-sized businesses stock isn’t formally allocated (or at least not publicly traded) so the Shareholders Equity section is simpler than what is shown below. Think of this simply as the net worth of the company, which in the simplest sense is equal to the amount of retained earnings held by the business.
Coming soon!
Remember how in elementary school the teachers frequently talked about kids in the class having different learning styles? Multiple studies show that more than 60% of the population are visual learners… and common sense tells us that very few people easily consume endless lines of numbers in a table. The numbers blend together. They are often shown in unfamiliar units (i.e. in thousands or in millions). Yet finance and accounting professionals frequently produce endless tables of numbers and expect them to “tell a story.”
Below I’ve included Nike’s Income Statement from their most recent 10k (yes it’s really that small).
An unedited Income Statement for Nike. Pulled directly from the company’s 10k.
Let’s compare the Income Statement above to a "Visual Financial Statement,” I created. The expenses are shown in light blue and are “costs to the business” (for example Total Revenue minus Cost of Revenue equals Gross Profit). Is the Visual Financial Statement perfect? No. Does it need to be supplemented with more detailed financial data for those who want to go deep in the weeds? Yes. But for the large majority of people, this tells a story that they can’t get from the table above. Trends are easier to identify, comparisons are easier, and the true nature of how money flows from Revenue to Net Income is more clear.
A “Visual Financial Statement” for Nike. Light blue bars are expenses.
I’m arguing that many finance professionals need to do better. My clients get Visual Financial Statements regularly. Not just to understand their Profit & Loss but also for Cash Flows, and other key metrics.
I’ll make my final point by stepping out of the world of finance and into the work of statistics. The following four datasets (know as Anscombe's quartet) have the same descriptive statistics (things like the mean, median, and variance). If we looked at summary statistics of the datasets we would be misled (because those metrics would imply that these datasets are the same). So, let’s use a visual representation of the data instead (if you imagine these datasets are financial metrics of a company, it’s easy to see how important the visuals become).
Your regular friendly reminder…
— Steve Stewart-Williams (@SteveStuWill) June 27, 2022
These datasets all have the same mean, median, and variance. Moral of the story: Always visualise your data!
Source: https://t.co/RttvWiBfbo pic.twitter.com/EIGfSsgg8Z
I’m excited to announce that I have officially launched a financial strategies firm focused on helping small businesses better manage their finances (i.e. optimize profitability, manage cash flows, plan & budget, complete a business valuation, create an exit strategy, etc).
Now I know that not everyone reading this owns a small business, but imagine that you do…
What if I told you that you could have a long-term strategic partner to handle all of your finance questions with ease… so you could focus on better (and more interesting) things?
…And what if you could bring that partner into your business for a fraction of the cost of a full-time CFO?
If you know me well, I’d ask you to keep me in mind the next time you or a friend of yours mentions a financial challenge that they haven’t been able to solve (inflation, employee retention, etc). Please always feel free to grab some time with me to discuss (using this link).
There is additional information about the business and what makes my firm different from the average competitor, here:
The website: mccauleycapital.com
A resource for frequently asked questions about Fractional CFO services
Every business is different and all my solutions are tailored specifically to the needs of your business, but the lowest hanging fruit is typically in the following areas:
Adding intelligent cash management (this is an easy way to make tens of thousands of dollars per year) and most small businesses don’t even know about it
Improving profit margins (by thoughtfully reducing expenses and targeting high margin opportunities)
Reducing financial stress (regular one-on-one meetings to take the headache out of managing your business finances)
