Ignore Financial Statement Analysis?

One of the biggest mistakes I made early in my journey was dismissing financial statement analysis as something too complex for me to understand. Coming from little to no accounting background, I assumed the subject was rocket science. The whole presentation of a company’s financials felt like a blur. Even when a balanced financial statement was right in front of me, I felt as though I needed a secret key to unlock its meaning.

What I hadn’t appreciated was that accounting is simply a structured way of tracking money. A long time ago, people developed systems to record cash inflows and outflows, journal every entry, and ensure the books balanced. At first, I found this bookkeeping process tedious and overly complicated. In reality, modern accounting has made the process much simpler, while still giving investors a clear picture of a company’s health.

Financial statements boil down to a few essentials:

• The income statement, showing revenues and expenses.

• The balance sheet, laying out assets, liabilities, and equity.

• The cash flow statement, breaking cash into operating, investing, and financing activities.

These three reports are built on one or two master principles: assets = liabilities + equity, and after every debit and credit, the books must balance.

From an entrepreneurial and investing standpoint, cash flow is particularly important. A company must be able to sustain itself as a going concern. Without healthy, consistent cash flow, profits on paper mean very little.

For those who, like me, once found accounting intimidating, I highly recommend Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers by Karen Berman and Joe Knight. It explains these concepts in detail with practical commentary. Click here to learn more.