What the hell is going on (ask your financial statements)
A friend recently asked me how to structure a P&L. I started writing an article about that, then I realised I will first need to explain what a P&L even is. Then I realised I will also need to explain what financial statements are. So I deleted the whole thing and wrote something more fun (I hope) instead.
But, it needs to be done – and as a founder, you need to know the absolute basics of financial statements.
Because together, the three main financial statements (the profit and loss statement, balance sheet, and cash flow statement) answer the million (or billion) dollar question: What the hell is going on in this company?
It’s what you should look at. It’s what any potential investors will look at. It’s what your bank will look at if you want a loan. It’s what anyone who may want to buy your company will want to see. And if you ever want to invest in other companies – for example, in the stock market – it’s well worth wrapping your head around it as well.
Here are a few examples of things you can tell just by quickly glancing at these three documents, that often aren’t longer than one page each, once you know where to look.
Is this company growing?
Is it profitable?
Is it becoming more or less profitable over time?
Which products or services are profitable? Which ones are losing money?
Can it afford to hire more people?
Can it pay its suppliers on time?
Is it running out of cash?
Good questions, no? As a founder, you absolutely need to know these things, and while it’s totally fine (read: recommended) to have your accountant prepare those statements, you need to have a high-level clue as to what they mean, so you can take action. After all, your accountant won’t revise your hiring plan or renegotiate supplier contracts for you.
Of course, these documents are not the whole picture. They won’t tell you why a product sells or why it doesn’t; they won’t tell you who to hire; they won’t tell you which marketing techniques work best. You will need to look elsewhere for those insights.
But they will tell you the big picture, which is ultimately what matters the most.
So next week – P&L.
Love and cash flow,
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