business-haroun/mba/ch34.org

Section 6 | Lesson 34 - Balance Sheet, Cash Flow Statement

• Links
• Notes
  • tips
  • financial analysis
    • years 3-4
  • copyright and trademarks
  • balance sheet
    • banks
    • terms
  • Income Statement
    • Financial Summary
      • Gross Profit
      • Earnings Before Interest and Taxes (EBIT)
      • Earnings Before Taxes (EBT)
      • Net Income
    • Explanation of the Financial Summary
      • Gross profit
      • Earnings Before Interest and Taxes (EBIT) / Operating Profit
  • Cash Flow Statement
    • A. Cash Flow From Operation
    • B. Cash Flow From Investing
    • C. Cash flow from Financing
    • Total Net Change in Cash
      • Depreciation
      • Accounts Receivable
      • Accounts Payable
  • Financial Ratios
    • why do we care
    • what matters
    • how to read financial statements

Links

• <Back to Main MBA
• S06:L34 Income Statement, Balance Sheet, Financial Risk
• S06:L35 Cash Flow Statement

Notes

tips

• confidence leads to perceived competence, especially in sales
• confidence is king
• in baseball you miss more often, so the best hitters are insanely confident
• when presenting to investors get into the confident state

financial analysis

• don't focus on memorization
• if you understand you will remember it

years 3-4

• growth is accelating
• running out of cash

copyright and trademarks

• ™️

  • meaning: brand, logo, or phrase that is claimed but not yet registered with a government trademark office
  • legal: limited protection, intent to claim but not the legal weight of a trademark

• ©️

  • meaning: creator of a work owns the copyright
  • legal: automatically granted as soon as work is created and fixed in a tangible medium. symbol serves as a public notice
  • applies to creative works, not brand identifiers

• ®️

  • meaning: officially registered with a government agency
  • legal: strongest protection for brand, logo or phrase. allows the owner to sue for damages if someone infringes on the trademar

balance sheet

banks

• you shouldn't deal with banks early on

• you want to deal with multiple banks

  • best deal
  • options

terms

• balance sheet: tracks everything you own or owe
• equity: what people own
• debt: what banks own

• assets: what you own

  • current: stuff you can sell in less than one year

    • equipment

  • long term: stuff you can't sell in less than one year

    • factory

• liabilities

  • current

    • stuff you have to pay back in a year
    • credit card
    • payroll
  • long term

Income Statement

• tells you about your income

  • top line is sales / revenue
  • bottom line is net income

Financial Summary

The following is a fictional summary of a the finances of a watch company

Gross Profit

Category	Quantity	Per Unit	Total
Sales	1000	$300	$300k
Cost	1000	$200	-$200k
Gross Profit			$100k

Earnings Before Interest and Taxes (EBIT)

Expense Type	Amount
Marketing expenses	-$10k
Employee expenses	-$30k
Rent expense	-$17k
Depreciation	-$2k
EBIT	$41k

Earnings Before Taxes (EBT)

Item	Amount
Interest	-$1k
EBT	$40k

Net Income

Item	Amount
Taxes (25%)	-$10k
Net Income	$30k

Explanation of the Financial Summary

Gross profit

the monty you bring in taking away only the cost of manufacture

Earnings Before Interest and Taxes (EBIT) / Operating Profit

• this is also called "The Line"
• this composes operating expenses and depreciation

• depreciation is the wear and tear on your equipment

  • in the US you can deduct that cost
  • this means you can deduct from the use of even a car

Cash Flow Statement

A. Cash Flow From Operation

Expense Type	Pos/Neg	Amount
NetIncome	Pos	$30k
Increase in Depreciation	Pos	$2k
Increase in Accounts Receivable	Neg	-$10k
Increase in Accounts Payable	Neg	$20k
A = Net cash flow from operations	Pos	$42k

B. Cash Flow From Investing

Expense Type	Pos/Neg	Amount
Increase in equipment	Neg	$40k
	Neg	-$40k

C. Cash flow from Financing

Expense Type	Pos/Neg	Amount
Increase in Loans	Pos	$20k
C = Net cash flow from financing	Pos	$20k

Total Net Change in Cash

Category	Amount
A + B + C	$22k
Beginning Cash Balance	$60k
Ending Cash Balance	$82k

What we are determining in this category is ACTUAL CASH money we can actually use

That's why in some cases, like Depreciation or Loans, we take off on the Income Statement but add it back here. Or Accounts receivable, which haven't been received, we take off.

Depreciation

• it's important to understand that "depreciation" is actually just bullshit meant to help you on your taxes
• you are "detracting" from your earnings what the depreciation should have been worth
• but in reality, you didn't lose anything
• so you have to add it back if you want to know what you really got

Accounts Receivable

• listed under 'current assets'
• collection typically occurs within a year
• money owed to a company by its customers for goods or services
• expected to be receives
• we have to deduct that b/c even tho we "should get it" we HAVEN'T got it

Accounts Payable

• listed under 'current liabilities'
• payments generally made within a year
• money a company owed to suppliers or venders for goods or services purchased on credit

Financial Ratios

• understand them
• don't memorize them

why do we care

1. so equity investors can decide to invest or assess our performance
2. so lenders can decide to lend / assess loan performance
3. business owners can track performance

what matters

• when you get to B round

• otherwise cash burn rate / month

  • friends, family
  • first venture capital firm
• cash flow is REALLY important at the end of the process

how to read financial statements

• treat it like a good book
• look for patterns