Accounting for Entrepreneurs How to use Accounting for Business Ashley Talks 107

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Ashley Talks by Ashley Dudarenok

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hi all I recently attended a fantastic presentation by Keith Cunningham and he was talking to us about accounting for entrepreneurs and even though it sounds extremely boring he made it fun he made it clear and very very simple I asked a couple of my LinkedIn connections whether they would like a video about it and many said yes so today I'm gonna walk you through that presentation and a couple of key principles business is a game and any game has a specific language for it for instance if you play basketball if you play American football or if you play cricket you have completely different terminology to determine certain things it has rules and it has language business is very very similar it also has a specific language and the language of business is accounting the thing is if you do not know the language of business you will not be able to understand what's going on and you will not be able to even tell losses from winners I'm gonna show you an example and this is the scoreboard of cricket a very cool game a lot of people in the UK a plane and in India a plane and you can see this is the scoreboard people that are not familiar with cricket looking at that will not even be able to understand who are the winners who are the losers and what's going on so that happens in business exactly if you do not understand your dashboards you will not basically Excel and the language of business is accounting and there are three dashboards and scoreboards that you as business owner must understand before that we're gonna look at our mmm let's say slow success flow this was also extremely extremely interesting so basically that's how a business goes right there is management management makes decisions decisions are translated into actions and then actions in your business are translated into numbers right so management gives the direction we decide we act on it introducing new product moving ahead with a certain certain service or reinstalling a system and it moves in two numbers if it is good management good decision it turns into good activities and good numbers if the number is a bad that means their activities with shitty decisions were shitty and that means the management was also shitty very interesting to understand is that the job of accountant is to translate activities what happened in the business into numbers and the job of a business owner is to translate numbers into activities to understand this is a digital performance how do I actually take that translated into activities change the activities and basically improve the numbers if you do not change the activities the numbers will not improve right so change activities change the numbers we go into the three very important dashboards of accounting there are three of them and you definitely heard about all of them number one is balance sheet right so this long piece of paper that your accountant gives you balance sheet the second type of scoreboard that accounting the language of business offers you is called income statement and the last one is called statement of cash flow so three score boards of business most of the business people jump straight to the income statement because they want to see what is the profit right so when I used to receive my accounting things I would also jump straight to that and right now I understand that this is not a good idea so you need to actually look at all three papers let's take a look at what those papers are and how to make sense out of them so here is the balance sheet here is how the balance sheet looks and it's very very simple we don't over complicate it first thing here first column here is all your things and stuff all your things and all your stuff what kind of things and stuff does a business have firstly its cash cash is the most important thing and stuff that you as a business must have number two is accounts receivable so if your customers have not paid you yet but they owe your money basic that accounts receivable the next one is inventory right so you bought a you bought a printer for instance you are a lemonade maker and you buy tons of lemons to make lemonade to produce that stuff right so this is your inventory and then there is PP which has property plant and equipment yeah so all these things here on the other side here you've got things that you owe and here are the things that you own so the things that you owe to somebody else are called liabilities for example accounts payable you need to pay your suppliers you need to pay somebody but you haven't done that yet then there are Texas right and of course there are rates if you borrowed money from a bank or institution and you need to pay that money out this is the rate then there is equity there are only two things that business owns two things and this is called equity number one the investment if I invest in my company business owns it that's investment number three your profit and earnings and the profit and earnings can be distributed to shareholders or profit and earnings can be kept in the business right so why is it called balance sheet because if here I have liabilities that is sixty and here I have a cutie which is let's say $40 then my assets must be $100 so the two sides always balance out let's take a look at the second dashboard of business which is called the income statement all many people know it as P&L let's take a look at P&L very straightforward there is sales revenue turnover and minus expenses and then we have our basically bottom line with profit net income and earnings for instance if you're making lemonade and you spend you salt for $100 and then your expenses were 60 then obviously your profit net income earnings are $40 right in terms of income statement we need to understand that profit as a concept is actually a theory why because you cannot spend your profit you can only spend your cash your profit is what your business could be in a couple of let's say weeks or months from now but people have not paid you you have not paid people it is a theory of what you could be so if we look at our let's say income so a balance sheet this is a snapshot it's like if we are shooting shooting a movie this is a picture just one picture just one snapshot because it is as of a certain date so the balance sheet means today on the 1st of September this is how well Ashley's company is doing this is how much liabilities equity and assets she has it doesn't tell me why or how did we get here when we look at our profit and loss statement this is not a snapshot it is actually a movie so it tells us from this date to this day for example for the period of 6 months 12 months after this company total fails total expenses yeah is this and that's what the theory for the profits is so profit is this theory right that's how much money we potentially made but whether or not we made this money will be reflected only in the last sheet which is statement of cash flow you cannot spend your profit you can only spend the actual cash so this is an extremely extremely important final statement score statement of cash flow and here you've got three types of cash number one is operational cash Oh operational cash so this is cash generated by business for example paying bills right it can be plus a negative and positive negative for example I'm paying some bills right this is my operational cash flow something that helps me do business and and it can be positive my clients pay me so I receive money from the clients the second type of cash is called investing cash flow so that invest in cash flow happens for example negative what I by you know invest in something and positive for example when I sell my used car and I get this money coming in yeah so my kind of investment coming back when I sell fixed assets most of the times and then there is financing cash flow financing cash flow happens positively comes into your company with investment right and of course negative whether you need to repay the rate when you need to repay your investors so these are three types of cash flow and as you can see operating cash flow investing cash flow and financial cash flow and not created alike the most important cash flow is obviously operating cash cash flow right and the balance sheet does not put a distinction of where does the money come from it just tells you cash but here you can exactly see how well your business is doing and cash is not a theory it is as it is it is a fact so this statement of cash flow is also a fact and it tells you how did you get there it is not a snapshot yeah it's also a movie so it basically tells you from this time to this time that's how much money Ashley's company has made so now this is where the magic happens this is the whole accounting for managers let's take a look at this the first one is the balance sheet and you will see here we have our assets or we call it things and stuff the most important things and stuff is your cash here it is your cash is the most important and then all the other things and stuff that you have here we have the things that we oh yeah so our liabilities a list of liabilities then we have things that we own yeah these are our profits yeah and these are our investments then we have another sheet which is the profit and loss statement right so P&L we look at the sales we look at the expenses and we look at the bottom line which is the profit so these how do these sheets come together this ammount here which is the earnings is exactly the amount that goes here right so these are the earnings then we have another sheet which is statement of cash flow we've got our operating cash we've got our investing cash we've got our financial cash we've got total cash flow yeah plus minus plus minus we've got our total cash flow in here and this cash flow goes directly into things and stuff into our balance sheet so this is the accounting for business that everyone and anyone needs to understand cash flow is the key this is your most important statement are you making money this is a fact this is not a theory profit is a theory you need to understand all three of those dashboards and how they come together you don't need to be an accountant a lot of business owners feel that they need to be accountants but you need to understand what your accountant is doing in order to be able to translate those activities these dashboards into managerial decisions you need to be able to read that rugby or cricket dashboard to tell winners from the loser loses what are the losing activities what are the winning activities and this is a very simple way to basically explain it and that's what you can request from your accountant they give you the numbers you look at the numbers and you make decisions you don't need to be an accountant yourself but you need to understand it all and remember management makes decisions good decisions lead to good actions and good actions lead to good numbers right so the job of accountant is to translate activities into numbers and your job is to translate numbers into activities now I hope you learned a lot and I hope you're gonna go and get them all this is accounting Keith Cunningham has done an amazing job I have taught my team those things they loved it and right now we're implementing it in our business and changing the way we communicate our financial statements because we were very scared of them and we really wanted to just look at profit and then shuffle it down and put it away this is important to understand and what can you do out of it a lot of people also ask first of all you need to clean up your dashboards you need to really make sure that you look at those things regularly you understand them and you direct your accountant to give you that stuff secondly because operating cash flow because cash flow is the most important thing you need to work consistently on increasing that cash flow and there are three things you can do number one thing you can do to increase your cash flow is you need to have less cost so for instance in my business it's an agency business it's a training business so it's all about people I don't have factories I don't have plants I don't have equipment but I have people so the last people I have the law on my cost so make sure you're doing the most with the least people secondly you need to get money up front so make sure that you're you don't have a lot of money that customers owe you request them to prepay seventy percent or a hundred percent yeah the bigger the stronger you become the more relationships you have with them ask them to prepay do not accept delayed payments or charge them really heavy fees for that kind of stuff get your money in first cash profit is a theory cash is a fact and number three thing you can do is when you pay suppliers you need to negotiate the terms when you can pay let's say one month later or two months later in my business it used to be so that our clients used to pay us with delay let's say two weeks three weeks four weeks with delay after we provided the service right if it is a retainer marketing agreement or it's a training so fifty percent in advance fifty percent a month after so that drains your cash flow drains it and I used to pay all our suppliers the day they sent out their invoice so that's really screwed up yeah make sure that clients pay you first you pay your suppliers a bit later and make sure you cut the costs so this is the way to keep your cash flow up and working it consistently I hope you enjoyed and thank you very much for watching

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