The Bible says, “Be diligent to know the state of your flocks, And attend to your herds.” (Proverbs 27:23 NKJV)
In those days flock signified wealth. The more flocks you had the richer you were. So in that sense it made sense to know how your property was counted—or accounted for.
Apart from sales, marketing, management, product development, SEO, conversion rates, clicks per whatever, and social media…the most important thing you as an entrepreneur can know is accounting. Because accounting is the language of business.
And you don’t really understand something until you understand its language.
Be Diligent to Know Your Books
Now the three things YOU HAVE to be able to read are your Income Statement (also called Profit and Loss Statement), your Balance Sheet, and your Cash Flow Statement.
Most people don’t know how to read these three…but those that do make more money than those that don’t!
For this post I’m going to deal with only the Income Statement and Balance Sheet. I’ll leave the cash flow the next post
So let’s start off:
Income Statement
The Income Statement indicates how revenue is transformed into profit. So, if you made$2000 in revenue but took home $200 in profit, the income statement show exactly how.
Total Revenue–is the amount of money that a company receives from its normal business activities, during a specific time period.
Cost of good sold–is the costs that go into creating a product that a company sells. (Example: let’s say you sold lamps for $25 but the cost of making the lamp is $10–so the cost of good sold (COGS) is $10 dollars)
Gross Income–is the company’s revenue less (or minus) cost of goods sold (Revenues–Cost of Goods Sold=Gross Income) (Using the lamp example $15 would be the gross income: $25-$10=$15)
Operating Expenses–is a category of expenses that a business incurs as a result of doing business. These categories are:
- Selling General and Administrative (or SGA)–these expenses consist of the combined payroll costs (salaries, commissions, and travel expenses of executives, sales people and employees), and advertising expenses a company incurs.
- Depreciation–a noncash expense that reduces the value of an asset due to wear and tear, age, or being outdated. By “noncash” it means that no money is being deducted. (Example: you buy a computer for $3000 with a useful life of 10 years. The computer loses value the minute you use it. So over 10 years you deduct the value of that computer until it no longer has value. Every year $300 would be deducted until you reach year 10)
- Research and Development (not listed)– is the effort and money required to create a new product.
Operating Income–is gross income less operating expenses (Gross Income–Operating Expenses=Operating Income)
Interest Expense–this represents the cost of borrowing money; the expense is usually on the interest (not the principal) of the loan.
Income Before Income Taxes–just like it says, its the earnings (or profit) before income taxes are deducted. Also called “pretax earnings.”
Net Income–the total profit the company has made. Also called the “bottom line.”
Balance Sheet
The balance sheet summarizes the company assets and liabilities at a specific pint in time; this shows what the company owns and owes. The balance sheet must follow the following formula:
Assets= Liabilities + Shareholder’s Equity
Current Assets-assets that expected to converted into cash within one year
Cash–Money available immediately, such as in checking accounts. It is the most liquid asset.
Account Receivables–this is money owed to the business from customers, vendors, and/or suppliers
Inventory–Raw materials and completely finished goods that are ready or will be ready for sale.
Long Term Assets–the value of a company’s property, equipment and other capital assets expected to be usable for more than one year, minus depreciation
Current Liabilities–are what a company owes due in less than a year
Accounts Payable–short term debts due to creditors
Current borrowing–loans that must be paid with a year
Long Term Liabilities–liabilities that are due in more than year
No related posts.
Financial Statements? I must admit I've never really understood them. Never made the effort to understand them. But I can see how they are vital to a business. I mean how can you keep the book if you cant read the books?
Absolutely!
I know when learned about them and studied them they really helped shifted my mindset from an employee to a business.
This is thorough…good stuff!
Thanks Steve!
You know a great site where you can get all this is info is http://www.investopedia.com. I've been reading them for a good while now.
If there's anything I respect: its how practical you make this
Thanks David!
I fell in love with investopedia.com since college. I actually got most of the info here from them. They're really helpful!
I can see the merit in accounting, but shouldn't we be trusting God to keep the books? I mean He said, He's be with us in all our ways?
Ben,
We trust God but that doesn't mean He doesn't expect us to be good stewards. I mean if you have a car you lock the door before you go in your house, dont you? Does that mean you're not "trusting God" No absolutely not! You are trusting Him because you're backing up your faith with works. And if you're a small business owner, yes you believe God is going to help you, but it also means you'll have to get your hands dirty.
Well said George!
George,
Its not that I'm saying I don't trust God, I am saying maybe its best to keep the accounting stuff to the accountants and focus on other stuff like…I dont know…the customers!
But I will admit…that was a good analogy
Bless you too sir!
I'm glad you guys hugged and made up…lol
This is good post Mike Holmes.
Its very rare that "Christian Business" sites even deal with accounting and financial statements in this matter. Especially since it is so vital to a business.
Kudos to you!
Thanks Scotty!
The closest I've seen is Christian Person Finance. That is really a good site. Very practical and simple.
I'm glad you enjoyed it