The first essential skillset is financial mastery
. Entrepreneurs do not need to be bookkeepers, but they do need to grasp financial statements. A business owner must understand the financial health of their business. It is also important to verify documents presented by hired financial professionals.
The key financial statements to master are profit and loss statements, cash flow statements, and balance sheets.
Consider this helpful excerpt from our 5 Pillars of Business Article:
"Here is a simple way to remember the three statements: The profit and loss statement compares the amount of money made to the amount of money kept. The cash flow statement shows where the cash went and where it is now. A balance sheet shows what is owed compared to what is owned.
Suppose that Christopher's Coffee Shop makes $100 when 10 customers buy $10 coffee. If the net profit margin is 20%, the coffee shop made $20 net profit.
This day of sales needs to go on the coffee shop’s profit and loss statement. Out of $100 in sales, there was a profit of $20. Hence, there was $80 in operating expenses to acquire that profit. Simply said, it costs the business $80 in expenses and payroll to produce that $100 of sales.
Think of the same scenario in terms of a cash flow statement. $100 entered the business as sales. $20 of those sales was earned as profit. The $80 difference relates to purchases made weeks ago.
Two weeks ago, the vendor for coffee beans and cups charged 50% down. Some of the $80 in expenses that ate away at revenue also go towards paying baristas. There's a journey with cash, and that journey is often not complete after a single day. The cash flow statement helps business owners track the flow of money.
The balance sheet also factors into the functioning of the shop. Let’s suppose that Christopher purchased the land his coffee shop sits on. The mortgage is for $100,000 over the course of 10 years. The property costs $200,000, but he put $100,000 down.
The balance sheet shows that he owns $100,000 (the money he put down) and he owes $100,000 (the money he still owes.) The percentage of the property that he already owns is an asset, and the percentage of the property that he still owes for is a liability. Assets are things that you own, and liabilities are things that you owe.
Take action by practicing your new skills by asking your accountant or bookkeeper to review the financial statements from the past month with you.