Understanding the Income Statement, Balance Sheet, and Risk

Chris Haroun
A free video tutorial from Chris Haroun
Award Winning MBA Professor, Venture Capitalist and Author.
4.5 instructor rating • 36 courses • 911,323 students

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07:48:36 of on-demand video • Updated September 2020

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English [Auto] Before we jump into this section I want to talk really quickly about risk and confidence. Let's kick it off with risk. The biggest risk is not taking any risk. In a world that is changing really quickly the only strategy that is guaranteed to fail is not taking risks. Mark Zuckerberg founder Facebook confidence we can do this. I saw this great movie called The Pursuit of Happiness and there is this one scene where Will Smith is telling his son that he'll never amount to anything and never be successful playing basketball. And it really resonated with me thinking that you can really accomplish anything in life if you're confident. And he ends that scene by telling his son Don't ever let somebody tell you you can't do so and if you get a chance watch that movie or go to YouTube and do a search on that scene and the pursuit of happiness. When Will Smith talking to his sons his real son real life was very touching. And so you know having a high degree of confidence will really help you be successful in life. Whether or not you think you can do it you're right. And you know confidence. According to Vince Lombardi a very famous football coach in the United States he said Confidence is contagious. So is lack of confidence. And I find the best athletes I've ever met in my life are very confident sometimes borderline arrogant which is cool but especially in a sport like baseball where you fail more often than not the most confident hitters are the ones that excel. And so when you're presenting to investors just get into that peak mental state and be incredibly confident because confidence leads to perceived competence. People think you're competent if you come across as confident in business especially in sales. OK. So we're not going to talk about financial analysis. And before I kick off this chapter I want to tell you and open up and be very honest with you is always that when I was younger and I was at McGill University I took accounting and I got a D. The first time and I got a D because I was memorizing stuff I was memorizing the equations. I did well I guess in high school because I memorize stuff. But university you kind of have to understand stuff and if you understand something then you remember. And so I do the course again and I did very well because I didn't memorize the second time but I got to do the first time and I thought my life is over. But anyway I want you to really understand and enjoy finance and accounting. And we're going to start from scratch I don't assume you know nothing about accounting and finance and if you already do. I'm very sorry if this recession is boring for you. All right let's do this. All right so we are on the third bar here we're between years three and four. We got funded by by Kleiner Perkins as well as coy as well as an angel investor. Revenue growth is still kind of accelerating you can see there. So today we're going to talk about financial analysis. OK. So where to start a company in that case can be a hypothetical company. It's going to be called Banana watch. I know that's lame it's corny but we're starting a company called the banana watch. OK. And we want to register in every state I think. Yeah. Yeah. Every state. So let me ask you Would that be T.M. trademark or our trademark or copyright to protect our brand in every state. The answer is OUR with a circle around it because T.M. as we covered earlier was just a couple of states. And copyright is is protecting something that's that you can't see feel or touch like like music or software or web. OK let's move on. So again don't memorize accounting or finance. I want you to understand it. Otherwise you'll get a deal in accounting like I did. Right. OK so let's talk about the first financial concept that I want you to know about which is the balance sheet. So think of a scale and this scale kind of tracks everything you own. Oh OK. So a balance sheet just kind of tracks. What do you own or who owns your stuff. So the balance sheet for my house might be that I own part of my house and a mortgage bank owns part of the House as well. I own part of my car. And Toyota owns part of my car. OK. So those are the claims. So it balances. So if you think about my car on a balance sheet scale I own half of that and Toyota owns the other half it kind of bounces that way. OK so a balance sheet just tells you what you own or who owns your stuff. OK. So let's go through it. So a balance sheet on one side is stuffy on and on the other side. It's the banks own your stuff or people that own your stuff. And when people own your stuff that's called equity and with based on your top it's called debt. So everything you own is either owned by banks or people including you said again everything you own is so stuff you own is equal to the exact same amount. So if you're on banks plus people on your staff and that skill has to balance to. OK. So stuff you own is called assets. This is the balance sheet in debt that you owe or people that you know lend you money whatever is called liabilities you're liable to pay them back. Right. And then the people that own your stuff. That's called equity. Right. And the people in your stuff include yourself. OK. OK. Good. Great. So here is one side the the asset side is angry and that's the left hand side is going in the right hand side of scale is liabilities or debt and equity. OK so let's go through the assets really quickly. So assets contain cash and stuff. You can turn a money less near stuff that is owned by US inventory equipments you know building stuff and liabilities is bills we have to pay. Right. Like keep the lights on salaries at the pay or wages you have to pay loans that are due in less than a year and loans are doing better in the year and equity is amount of money that we own in our company. For other people are coming great. So assets can be broken down further into current assets which is stuff you can sell unless you're and long term assets which is stuff that you can't sell us. Meaning it takes you more in the year to sell the stock. Liabilities can be broken down as follows. Currently bills is debt that you owe in less than a year like cards and long term liabilities. Is debt the and greater than one year like your mortgage. OK. And then equity is just the people that own your stuff including you. And so the assets have equal liabilities plus equity skills. About that gold. So assets current assets equals cash because cash can be converted into itself within less than a year. And treasury bills. So say your own treasuries are bought that kind of stuff. You can you can cash in less than a year. In this example OK credit and in liabilities is like long term assets. It's up like a factory. See there's a factory there in that picture. That's a very famous album. And somebody please write in the comments section on this course what album cover that is for what. And I'll be really impressed. I'm dating myself here. I'm older than a lot of you I'm sure. OK liabilities her liabilities includes credit cards as well as payroll yet the pay her employees you know under year you got to pay back the credit card in usually a month or less long term liabilities. In this case just assume as banks can't and I included many banks there and I missed this earlier in the re-inforced again you always make sure that if you deal with banks and you shouldn't early on. But if you do later on in life of your company you've got to deal with multiple banks write small increments. Why. Because you want those banks to compete. You want them to compete with you right for the TV the best rate possible or you want to keep in check. Kind of like you'd never just have one employee responsible for everything. Cashier he could quit you're screwed or you can ask for more money. You won't have many employees with different tasks right if possible. And then equity's is just that people including yourself that own your assets when you come in. And you'll notice that the left side assets has to equal liabilities and increase. So 120 can example equals twinking. OK. There you go. OK. So how do we order the items on our balance sheet. OK so what are these assets. Right. So you'll see oh by the way that's a Canadian $5 bill. How awesome is that. Those are Canadian kids playing hockey. I'm not rocks. It's the coolest thing ever on the back of our $5 bill. Sorry I digress. How do you value. How do you order these things. OK. So obviously you'd order the cash first. Right. They're Canadian dollars American dollars. Canada always comes first. And then you put the treasuries and then your longer term stuff you include like your factory OK and the same thing with liabilities. You want them the right way. So the Ned Flanders Homer Simpson credit card goes first within a month and salary salaries probably due around the same time. You've got to pay people every two weeks or every month whatever. So it may be salaries first then credit cards and then you've got short term loan long term loans and leases longer term. And so what is a lease What is this lease stuff you hear about all the time. Well a lease makes sense to have think of it as renting something for a walk. But there's tax cut of it. What if they can't afford to buy a machine to. Well I can kind of rents here at least said if I buy a machine then what happens is the debt will be so high. I have to finance it with debt that banks will get mad at me because I have a lot of debt. OK. I don't want to deploy that much money to buying a piece of equipment. Right. It's going to rent it instead. Or wait a second. That's the wrong machine. I've used it for two months. I want a Cancel option and cancel lease. That's easier than having to sell something. But OK. So that is a balance sheet in a nutshell.