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Understanding Financial Statements and Accounting: Crash Course Entrepreneurship #15 - YouTube
Channel: CrashCourse
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You know what conversation starter will make
you the life of the party?
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Spreadsheets.
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Ha... maybe not unless itâs a wild accounting
party, or if everyone really loves math.
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Even then⊠ehhhh.
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Honestly, âspreadsheetsâ are kind of the
vegetables of the business world -- the very
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idea of them makes some people queasy.
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But thatâs ok!
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They can be intimidating, but theyâre not
impossible to understand.
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Today weâre going to learn to love âem,
because basic accounting can make or break
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a business.
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If we lose track of expenses or overestimate
a revenue stream, we might end up questioning
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where all the money has gone.
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The key is using organized systems and knowing
the right vocabulary.
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And by the end of this episode, weâll be
bookkeeping pros... or at least able to talk
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about balance sheets and profitability with
an accountant.
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Iâm Anna Akana, and this is Crash Course
Business: Entrepreneurship.
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[Theme Music Plays]
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Every entrepreneur has to seriously think
about /how/ weâre going to take in money
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and where weâre going to put it.
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The place (and it could be a digital place)
where customers hand over money in exchange
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for a product or service is called the point
of sale.
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Cash registers, credit card machines, the
checkout page on a website -- these are all
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points of sale.
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Now, we want to make the buying process as
painless as possible so customers will feel
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good about doing business with us.
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And having a seamless point of sale system
is a big part of that.
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Here are a few options.
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Some of the most popular electronic systems
are created by Shopify, Square, and PayPal.
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Both Shopify and Square help you set up e-commerce
sites and have hardware to use in physical
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stores to register sales.
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And PayPal is an online checkout system that
makes it really easy for customers to make
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purchases.
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These are great options for entrepreneurs
with a lot of transactions or who are selling
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a product.
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If your business isnât set up for immediate
transactions, you can send customers invoices
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-- basically, itemized records -- to get paid.
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Many freelancers do this!
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Customers may want to pay by credit card,
so you might still look into one of those
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systems we mentioned.
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If youâre using a system that can process
credit cards, there will probably be a 2-4%
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processing fee, so youâll want to take that
extra cost into account when pricing your
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products.
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Then, of course, weâre going to need somewhere
to put all the revenue, like a business bank
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account.
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This is just like a personal account, except
it has a business name on it.
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Unless your personal account is just under
your mattress.
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In which case, itâs VERY different.
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This move is all about organization.
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Imagine scrolling through your transaction
history if you only had one account for both
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you and your business.
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Itâs just a swamp of latte receipts, supply
runs, grocery bills, production costs, and
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more.
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Some of those were personal lattes and some
were business lattes.
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When tax season rolls around in a few months,
are you really going to be able to remember
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the difference?
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Most importantly, we want to be able to tell,
at a glance, the financial health of our business.
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If calculating profit becomes a guess-and-check
walk through of every purchase weâve made
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this year, that simple ârevenue minus expensesâ
equation is suddenly much more complicated.
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To get set up in the US, youâll need your
tax identification number, the official name
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your company is operating as, and most likely
proof from your Secretary of State as to what
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kind of business entity youâre running.
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Depending on whether youâve decided to be
an LLC, a corporation, a co-op, or something
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else, you may need additional forms.
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Start with your current bank and see what
they offer for business accounts.
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But donât be afraid to shop around.
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Can you find free checking?
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Free savings?
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Better loyalty rewards?
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After getting money from customers and storing
it safely, we want to keep track of how much
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we have, and how much weâve spent.
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And some idea of how well weâre doing would
also be nice.
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We can track almost anything and make tons
of beautiful graphs, but there are three essential
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reports to measure our businessâs financial
success.
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These three reports are also well understood
by other businesspeople who might be trying
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to help us out in the future.
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An income statement, sometimes called a profit
and loss statement or PNL, is a report that
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shows how much money weâve spent
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and how much weâve made during some period
of time, usually a month or a year.
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Basically, it tracks the total revenue, total
cost of goods sold, the total expenses, and
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comes up with our net income at the bottom
-- which is total revenue minus costs of goods
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sold;
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minus selling, general, and administrative
expenses; minus all our other expenses like
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depreciation of equipment or taxes.
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Itâs important to write down every revenue
stream and every expense so weâre getting
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a complete picture of what our net income
is.
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The second report is a balance sheet.
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This is a snapshot of our businessâs financial
health at any point in time.
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So on the income statement, we looked at just
December or just 2019, but here weâre looking
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at all our money for all time.
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And there are three sections:
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The balance sheet will show our assets -- not
just our cash, but anything we could convert
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into cash within one year like property, equipment,
investments, or intellectual property.
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Assets are broken up into two categories.
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Current Assets are anything we could convert
into cash within one year, like cash or inventory.
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And Fixed Assets are purchased for long-term
use, so we probably canât convert them quickly
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into cash, like land or buildings.
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It also shows our liabilities -- all our financial
obligations and debts, like loans, mortgages,
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revenue weâre still waiting on, and expenses.
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Like with assets, liabilities are broken up
into two categories.
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Current Liabilities are debts that must be
satisfied within one year from the balance
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sheet date.
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And Long Term Liabilities are debts that arenât
due within one year of the date of the balance
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sheet, like mortgages.
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And it shows our equity -- or the amount of
money that would be returned to our shareholders
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if all our assets were turned into cash and
all our debt was paid off.
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Many of us may not have shareholders yet,
but we may have a friend or family member
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lying around that we just gotsta pay back.
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These three things /balance/ -- hence the
name balance sheet.
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Equity is really just assets minus liabilities,
which we rearrange to make the business equation
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Assets equals Equity plus Liabilities.
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Finally, the third statement we should be
familiar with is a cash flow statement which
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tells us how much money has moved in and out
of our business in a specific time period
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(again, like in a month or a year).
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There are three sections to this statement
too:
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The operations cash flow shows how much cash
was spent or earned from running the business.
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So this includes revenue, expenses, and taxes.
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The investment cash flow shows how much our
business sold or spent on property, plant,
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and equipment, or PP&E.
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This is stuff like selling old equipment or
purchasing a new building.
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And the financial cash flow shows the amount
of money our business got in loans or paid
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in dividends to shareholders.
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We can remember these three sections with
a made-up word âOIF.â
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And all three are added up to show the net
cash flow for our business.
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Since weâre looking at a specific snapshot
in time, we can add in whatever cash we had
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from before to see the total amount of cash
our business is sitting on.
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Letâs look at an example in the Thought
Bubble.
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Ronnie has his own event planning business,
and this year heâs planned some weddings,
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quinceaneras, bat mitzvahs, and fancy pool
parties.
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But is his business doing well?
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On his income statement for January through
April, we see he paid for SG&A costs like
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his website and his monthly accounting software
subscription, but he had revenue from planning
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three events.
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His net income is positive, meaning he made
a profit for these months.
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Nice!
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On his balance sheet, we can see he received
a bank loan, which is a liability.
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This loan is considered a current liability
if it will be paid off within a year of the
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balance sheet date, otherwise it would be
a long-term asset.
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He spent almost all of this cash from the
loan on event decor and a tech setup --
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a computer and tablet and one of those headset
things all official event planners seem to
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have.
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All this stuff, plus any cash he has from
his net income are his assets.
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Now, to calculate Ronnieâs equity, we subtract
the total liabilities from the total assets
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and thereâs how much he actually owns!
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Boom.
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Balance.
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Finally, on his cash flow statement, we see
three categories.
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The operations cash flow includes revenue
from his customers and any cash leftover from
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the loan.
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So his operations cash flow is positive.
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The investment cash flow includes the money
he spent purchasing new decorations and upgrading
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his tech setup.
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Since he didnât earn any money here, his
investment cash flow is negative.
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And the financial cash flow has the bank loan
that funded all his upgrades.
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His financial cash flow is positive because
that money came into his business.
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So overall, Ronnieâs making money, though
he does still need to pay off that bank loan.
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Hopefully that new decor and tech will get
him even more business!
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Thanks, Thought Bubble!
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To create these statements, we can make our
own spreadsheet for free, but that might require
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lots of data entry.
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[Yay spreadsheet fun...]
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Accounting software can be really efficient.
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And depending on our price range, many accounting
software systems have options for generating
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invoices and can play nice with our point
of sale system.
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Since many people are intimidated by anything
accounting-related (not us, of course!) there
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are tons of great choices.
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HubSpot has collected a list with a quick
analysis and cost breakdown and we put a link
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in the description.
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Some of the most common choices are Quickbooks,
Freshbooks, and Xero.
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Quickbooks is by Intuit, the same company
that creates TurboTax, and is probably the
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most well-known software for businesses.
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It can invoice people and interacts with many
point of sale systems.
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Freshbooks is also popular and offers very
similar options to Quickbooks, but is usually
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recommended for subscription-based businesses.
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And Xero is what Square recommends.
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So if youâre using Square as your point
of sale system, you might try Xero because
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they work really well together and pricing
can be a bit friendlier.
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Do your research to make sure whatever you
pick works well with the systems you already
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have, but ultimately, youâll get very similar
results with any of these.
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As we make more money, we might want to bring
on a key partner like a bookkeeper to handle
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the data, or an accountant to manage projects
and taxes.
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There are even services like Bench or SLC
Bookkeeping that will act as virtual accountants,
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but a local firm will also be glad to help
you.
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If this is the path you want to take, you
should still review your income statements,
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balance sheets, and cash flow statements regularly
and know what they say.
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This is all the behind-the-scenes action of
your business, and you donât want to miss
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out or get taken advantage of.
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Remember, youâre in charge!
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So consult everyone you need to understand
reports and strategize, but make sure youâre
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still the one making the final call.
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So we have these three reports as printouts
or PDFs, but how do we read them?
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Ahh yes.
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Mmmhmm, very good.
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Oh!
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Uh, this says my gross margin is half my dividend
payout ratio!
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That canât be right.
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There are hundreds of different metrics we
can use to see how efficient and profitable
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our company is, called accounting ratios.
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Because there are so many of these, we suggest
pulling up our old friend Investopedia to
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research what could matter to /your/ business.
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This is where finding a key partner who knows
their stuff can really help too!
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And finally, weâll say it again: donât
forget to file your taxes.
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Youâll probably have to submit one or more
of your financial reports along with the tax
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forms.
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Good thing youâre prepared.
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Depending on the country and type of business,
there will probably be different requirements.
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In the US, you can find most of what you need
online.
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For federal taxes, visit IRS.gov.
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For State taxes, look on your Secretary of
Stateâs website or visit your state department
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of revenue.
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And for city or municipal taxes, Drop a haypenny
in the town fountain and whistle "she'll be
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comin' round the mountain.
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No, seriously, you also check your cityâs
website.
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The bottom line is[... on your income statement!
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But really,] bookkeeping can be fun, or at
the very least understandable.
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Set up systems to manage your revenue, and
invest in software or people to keep your
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business organized and profitable.
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Next time, weâll keep talking about money
and look at funding options for when youâre
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just starting out.
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Thanks for watching Crash Course Business,
which is sponsored by Google.
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And thanks to Thought Cafe for these beautiful
graphics.
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If you want to help keep Crash Course free
for everybody, forever, you can join our community
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on Patreon.
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And if you want to learn more about taxes,
check out this Crash Course Economics video:
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