In order to be successful with your product business you should read Financial Intelligence for Entrepreneurs
It is essential that you to understand what the numbers mean – This is the ONLY book that you need for this.
You have to know how to read an income statement, balance sheet, and cash flow report – they will all become very important to your business. These are the reports that your bookkeeper, and later your accountant, will prepare for you showing the health and value of your business. I highly recommend reading and understanding this at the beginning of your journey to ensure you have proper habits and knowledge in place – right from the start.
Most of the terms within it you have heard of and may vaguely understand – but it really explains what the numbers mean, how they were calculated, and how to gauge if they are good or bad.
As an aside, after reading this book you will also be both a better manager and more astute investor. Understanding numbers and profitability is a definite bonus trait to have if you are an employee. Applying the same knowledge to your own department will make you more valuable to your employer while giving you an immense amount of practise with the material (all on somebody else’s dime).
As an investor, it is hard to make an intelligent decision to purchase stock in a company if you cannot determine its value, assets, and health. There are many areas in the book where the knowledge presented is used to look at a publicly traded company. In most of these cases, the company in question appeared to be healthy and profitable, but through use of financial intelligence, it was proven that they were certainly not healthy. Using this book on your personal investments could prevent you from falling victim to the next corporate fraud scandal where the CEO and CFO were found to be cooking the books. Numerous instances are also presented where the Sage of Omaha, Warren Buffett himself, has used these principles to either make outstanding investments, or avoid bad ones.
Certainly a lot for you to gain for a single book – that is why I am so highly recommending it.
Profit does NOT equal cash
If there is anything you should take away from the book, it is that profit, assets, and accounts receivable do not equal cash in the bank. Also, that profit on the income statement does not equal cash in the bank. Only a cash flow statement can tell you all of this.
Chapter 14 shows in very simple terms how a profitable business can run out of money within months, while a venture losing money can remain viable almost indefinitely.
Keys to understanding this are: knowing what revenue and profit are, how to read a cash flow statement, the payment terms on your accounts receivable and accounts payable, your fixed costs, and again – how to read a cash flow statement.
If you can’t actually afford to purchase the book, please pick it up in the store if you see it and read this small chapter – it could mean the difference between success and failure.
As they say, cash is king.
Income Statements and Balance Sheets
These are the standard financial documents that every business owner or manager has to be able to read and understand.
An income statement measures the incoming and outgoing business activities over a certain amount of time (month/quarter/year). It measures sales that were made (note this is accounts receivable sales, not cash income), costs of sales, overhead costs, taxes, etc. The end result is you can see your gross profit, operational profit, and net profit – hopefully all of these are positive too!
All of these topics are covered in the book. Example income statements are examined and common mistakes are looked at. The book even shows how creative accountants have, at times, cooked the books with creative pencil whipping.
The balance sheet shows the assets, liabilities, and owners’ equity of the business at a particular point in time. The authors provide a compelling argument for valuing the balance sheet higher than the income statement when gauging the value and success of the business. The analogy presented is roughly: Profit (income) is the grade you receive in a particular college course. However, Equity (balance sheet) is you cumulative GPA.
Ratios, Calculations, and Real World Application
After all of the study, the authors present how to apply this knowledge learned. It covers profitability ratios, leverage ratios, liquidity ratios, and efficiency ratios.
The fundamental concepts of ROI Return On Investment, ROA Return On Assets, and ROE Return On Equity are covered. Of course you are also taught how to calculate them yourself as well.
Ratios to test how well you can pay your bills in the next year (current ratio) – even if you couldn’t sell any of your inventory (quick ratio) are also covered.
You learn what important information you can gain from your inventory turnover rate and days in inventory.
Managing working capital and cash conversion rate are some of the last pieces of the puzzle.
Finally, real world application of all this knowledge is given to you. These are the tips of how to really use your business’ financial reports to ensure profitability and even prevent disaster.
Also, if you ever go to sell your business, you can be sure that all possible suitors will be looking at these statements – you may as well have everything in order now.
Overall, I highly recommend the book for all business minded people (lifestyle business owners, entrepreneurs, corporate managers, small business owners, students).
I hope that it can bring you an understanding of business finance as quickly as it did for me.
If you enjoyed this review, you can buy the book here on Amazon: Financial Intelligence for Entrepreneurs
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