Book: Financial Intelligence for Entrepreneurs, Karen Berman and Joe Knight

Review

A great book if you don’t have a background in economics/accounting or if you want to refresh the knowledge.

Buy on Amazon.com.

tl;dr

Separate out whatever is most important so that you can track it easily. Highlight what is changing, which numbers are where they are supposed to be, and which ones are not. Operating profit margin percentage (gross profit minus operating expenses) indicates how well you are running the entire business. Train your team on financial literacy. Open Book Management (OBM) at its best creates an environment where employees feel that they are part of the success – and are at risk for the failure – of the business.

Summary

The matching principle is a fundamental accounting rule for preparing an income statement. It simply states, “Match the costs with the associated sale to determine profits in a given period of time—usually a month, quarter, or year.”

In short, the point of these comparative income statements is to highlight what is changing, which numbers are where they are supposed to be, and which ones are not.

The one big rule: many numbers on the statement reflect estimates and assumptions.

Separate out whatever is most important so that you can track it easily.

Operating profit, or EBIT, is a good gauge of how well you and your management team are running your business.

Calculate percent of and percent change on your statements.

What is the balance sheet? It’s no more, and no less, than a statement of what a business owns and what it owes at a particular point in time.

Assets must equal liabilities plus owners’ equity.

A change in one statement nearly always has an impact on the other statements.

Gross profit margin percentage: revenue minus costs of goods/services.

Operating profit margin percentage: gross profit minus operating expenses. Indicates how well you are running the entire business.

You need to determine the ratios that are important in your business and then calculate and interpret them

Percent of sales: express each line item not only in dollars but as a percent of sales.

Sustainable growth rate: net income/revenue x revenue/assets x assets/equity = ROE (return on equity)

Often people analyze investments only to justify them. We recommend that you do the analysis and take into account what it tells you before you decide to make capital investments in your business.

Working capital = current assets – current liabilities

DSO (days sales outstanding) – that is, the average number of days it takes to collect on these receivables. The longer a company’s DSO, the more working capital is required to run the business.

When everyone in the business understands the company’s objectives and works to attain them, it’s easier to create an organization built on a sense of trust and a feeling of community.

The more that organizations trained their people in financial literacy, in other words, the better the organizations did. Do the training yourself. Teach some of the basics of finance to everyone.

We also suggest posting them on a scoreboard and comparing past performance with present performance and future forecasts.

As with your dashboard, make sure the scoreboard is clear, straightforward, and easy to see.

Business owners often assume their employees know more about financial measurement than the employees really do.

Open Book Management (OBM) at its best creates an environment where employees feel that they are part of the success—and are at risk for the failure—of the business.

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