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28One 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