Summary: "You may be a great salesperson or an inspired engineer. You may be terrific with customers and employees. Your concept for a company is probably fantastic. But if you don’t know finance, you’re operating at a disadvantage in the world of business.” Financial Intelligence for Entrepreneurs, page 4 Do you know what your burn rate is? What about your cash conversion cycle? Are you surprised that your company is running out of cash even though it’s profitable? These questions, and more, are answered in Financial Intelligence for Entrepreneurs as Karen Berman and Joe Knight, founders of the Business Literacy Institute, break down what the numbers in your business really mean. They walk through, step-by-step, how you can analyze your company's Income Statement, Balance Sheet and Cash Flow Statement to really understand how your business is performing and how you can make more informed, and better, business decisions. And no, you don’t need an MBA in Finance to understand all of it either. But before you get caught up in calculating profit margins, return on assets, days sales outstanding and other critical ratios, it’s important to understand one fundamental principle: “finance is as much an art as it is a science.” Golden Egg Learn the Art of Finance “The art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company is performing.” Financial Intelligence for Entrepreneurs, page 6 I think we can all agree that 2 + 2 = 4. But when it comes to the world of business finance, it’s not that clear cut. “[bookkeepers and accountants] can’t know exactly what everyone in the company does every day, so they don’t know exactly how to allocate costs. They can’t know exactly how long a piece of equipment will last, so they don’t know how much of its original cost to record in any given year… Accounting and finance are not reality, they are a reflection of reality, and the accuracy of that reflection depends on the ability of bookkeepers, accountants, and finance professionals to make reasonable assumptions and to calculate reasonable estimates.” (pg. 6) GEM #1 Understand the Assumptions & Estimates “If you aren’t aware of the assumptions and estimates that underline the numbers and how those assumptions and estimates affect the numbers in one direction or another, your decisions may be faulty.” Financial Intelligence for Entrepreneurs, page 13 Bookkeepers, accountants and other financial professionals in your organization make various assumptions and estimates when they prepare financial statements such as the Income Statement. And it’s crucial to the success of your business that you understand what these assumptions and estimates are because these are the numbers you use to make daily decisions on the direction of your business. Let’s look at an example that Karen and Joe share in the book: “Imagine, for instance, that you run a business that resells specialized telephone equipment to local customers. Most of your customers buy the equipment with a maintenance contract, and the whole thing is wrapped up in one financial package. Now, suppose you deliver the equipment in October, but the maintenance contract is good for the following twelve months. How much of the initial purchase price should be recorded on the books for October? After all, you haven’t yet delivered all the services that you are responsible for during the year. Your accountant can estimate the value of those services, of course, and adjust revenue for October accordingly. But this requires a big judgment call.” (pg. 12) As you can see, even seemingly simple questions like “When is a sale a sale?” require some assumptions to be made. And if you take the example above one step further and realize that you most likely pay out sales commissions and bonuses according to how and when revenue is recognized,
