How to Use Your Income Statement as a Roadmap to Success

Learn to master the flaw of averages, limited comparisons, and pickled percentages and unleash a whirlwind of profit.
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  • Lectures 8
  • Length 1 hour
  • Skill Level All Levels
  • Languages English
  • Includes Lifetime access
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About This Course

Published 11/2013 English

Course Description

Working hard in your business, there can be precious little time to work ON it, to make things better. When you do find time, trying to see what matters in columns and rows packed with too much data but too little meaning bites!

Do I have the cure? Not just how to keep the books, but how to know their meaning, you will learn everything you need to know to revitalize your business reports by taking them visual, then seeing in an instant the meaning trapped inside the data.

The course includes:

  • An entertaining Primer on Financial Reports and Accounting Principles, if that is possible...
  • In depth look at the problems of these reports as tools for operating a business
    • The Flaw of Averages
    • The Foibles of Percentages
    • And the Dangers in Limited Comparisons
    • Then an introduction to reports that do work
    • Using the National Pastime and other real world examples


This is the companion course, and an introduction to the course "Predict to win in Business" in which you will learn in depth an even more useful method, and how to do it for yourself.

If Simon Sinek helps with the why, this course helps with the how. How to know with precision what you need to make things not bite and have time in your life, and work, and enjoy it.

You only need to bring your uncomputer... your mind.

The course is made up of 7 video classes, lasting over a life enhancing hour, and will change the way you look at data for the better!

What are the requirements?

  • Bring your noodle, as in frontal lobes (your un-computer) and a sense of humor.

What am I going to get from this course?

  • Learn to find the meaning trapped in tables of data, rows and columns of numbers in spreadsheets, by visualizing them in context, instantly.

What is the target audience?

  • Managers, Business Owners and Sole Proprietors and anyone else who has to decipher the meaning in data trapped in spreadsheets.

What you get with this course?

Not for you? No problem.
30 day money back guarantee.

Forever yours.
Lifetime access.

Learn on the go.
Desktop, iOS and Android.

Get rewarded.
Certificate of completion.

Curriculum

Section 1: Introduction and the Basics
04:22

Welcome and Thank You!

This course is the companion course to "Predict to Win in Business with Excel" a 5 hour course that goes into depth to take you through, step by step, how to create the tools explained here, and provides many real world examples... It acts as a precursor course aimed at covering the basics of financial reports, like a primer, and introduce the most important fatal flaws for running a business that are too often made when reading financial reports.

If you enjoy the course, please review it by clicking on the stars at the top right of your course page and writing a short review. It helps people feel more comfortable taking a course, I know it helps me! If you want to share any ideas on how I can make this better, send me a note. I cannot guarantee I will make a change, but I will listen and take it very seriously, and thank you profusely.

I provide you with a coupon at the end of this course so between buying this and the other one you still end up with a hefty discount.

16:16

Transcription:

So in this class were going to take a quick trip through the most important financial reports. Kind of the ABCs of the Generally Accepted Accounting Principles.

We are going to take a look at those accounting principles, inked back in the 1930s as a reaction to what had happened in 1929 known as Black Tuesday, when the stock market crashed and bankers and investors were burned. In fact to some of the them rumor has it tried to see if they could fly. So the bankers and investors still alive go together to figure out a way to protect themselves in the future even from their own tendency to get emotionally carried away, and put theirs and other people's hard-earned money at risk.

So what happened, with a lot of pushing from Congress, at the time, was everyone agreed to come up with some basic ways of doing the books in common so that they could fix the value of their investments in time and know if their loan was at risk, or if it was a good investment, or how much money they were going to make when they sold their shares; which was a sensible thing to do, when you think of it. And they based it all on double entry of bookkeeping, in particular. When you look at the three most fundamental reports:

  • the balance sheet, which fixes the value of the company in time
  • the cash flow, which is really elegant report in that really covers how the whole system inter-relates, but it just covers how the cash flowed through, not how you made it,
  • and then the profit and loss statement.

With an eye, in particular, on the conflicting needs placed on the profit and loss report as the main report used, some would say by torturing the report into a kind of one-size-fits-all management report.

So when they were doing talking with each other and finally succumb to the pressure of Congress what they did is they put together a document which has evolved over time, and is currently being changed keep up with the times. The American version of it is the FASAB the Federal accounting Standards Advisory Board, and international IFRS. For the purpose of this, I used the FASAB because they give their book out for free, and the IFRS charges you a bit of money for it, but you can look those up onlin,e and get a copy.

It's really not that complicated, and the differences between them are minor, and their working, as we speak, on unifying them into just one set of guidelines.

What you are looking at here has been called the journal, at least since 1794, and it's basically like a checkbook. You'll notice that it has codes of accounts, on something we don't usually have in a checkbook, voucher numbers which are like a check numbers, and that it has a column for the money that came in, and a column for the money that went out, and finally a balance column.

These numbers from the Journal would be placed into ledgers based on the account numbers, like the 200, and each ledger would contain just one account, so there would be a code of account 200, and then a code of account 300, and each of them would be a different ledger. And this has remained pretty much unchanged until today, but of course, in 1934, when the rules for the profit and loss statement were put down, and even as originally conceived was quite simple on the face of it, it's just we managed over time to turn in something much more complicated than it was intended to be.

All it was really set up to do is to tell the owners and investors how much money came, and how much went out, and how much was left over; and it does that by first telling the sales, how much came in, then subtract the raw materials to make the product that sold, and that leaves you with the gross profit, and then you subtract the expenses from the gross profit, and what you have left is your net profit.

And I know I going to be surrounded by hordes of the people in pocket protectors, but really, it's as simple as the guidelines, as it tells you what comes in, what went out, and then what you have left over, and that's in any given period. And they even, in the guidelines they give you a lot of leeway in how you define a period; There are some companies that do monthly, other companies start the annual year in June. and other companies that do 13 periods so you can have even 4 weeks, kind of neat, huh? and then there are companies that don't do a profit and loss at all. By law, unless you do business with the government or you are a publicly traded company, or certain kinds of partnerships, there is no requirement to do it; you have a lot of leeway and can keep the books pretty much how you want.

I know if you were when you started your business skills particularly if you want to get a loan from the bank or get investors, you had to do a pro-forma business plan. And of course they tend to paint a rosy picture, and the smarter ones throw in a few losses here and there, to make it sound convincing, but what they are really interested in is getting the money from the bank, and getting the money from the investors, and once they are operating, sadly, they tend a lot of times to pay no attention again to the business plan.

When people do pro forma business plans they do one thing really right, they show month after month the progression of time, how they say their business is going to do. They follow the same model, they have the sales, what came in, the cost of goods, the expenses, and then what's left over: they have in, out and what's left. And the irony is that with their feedom the last time they have reports as simple as this, that has just the real numbers without a lot of junk in it, is in the pro forma, and then they never look at it again.

And now we've got another version and it kind of looks like it was done in an old dot matrix printer, and already we see they are kind of adding things in that aren't required, like the number of weeks trading, and the average of business visits per week; but that has nothing to do with the financial reports, or the Generally Accepted Accounting Principles. That is something they're doing, and as you see they've broken it down by quarters, and they added in percents for their management purposes is not what's required by the GAAP.

And now we have the this next report, and doesn't it look nice? It is really nice great, nice font, lots of white space, and it illustrates one of wonderful advantages of the GAAP Guidelines is that they're very careful to make them flexible because it's a private and public partnership, well, a private partnership forced by the public. This allows you to make summary reports, which you can use so as not to confuse investors, and if they want they can get more detailed reports. Sometimes they are used to keep information under control, for instance, like this here for the Latin American region, and obviously they don't want them to see what any of the other regions are doing because they left them out of the report.

But the interesting stuff here is that they've got in and they've got out, and they've got what's left, but then they throw some other stuff in here: they got the year to date, budget through current month, year to date budget variance, they've got the year-to-date budget variance percent and people add that stuff in because they believe it helps them manage. Now, we'll get into my thoughts on the budgeting process later, except to say that there really is a much better way to do things.

it okay so they've added a couple columns here and stuff but this is a very clean report, and is nothing compared to what else gets added to the profit and loss statement.

Now this is an impressive report: look at all those columns and rows and little things in bold. I mean, it's a hotel Corporation and on this side they've got the current month and down the middle they have the description and then on the other side they had the year-to-date. It is nice having down the middle as it does help a little bit to understand with all of those columns. But, all I can say is thank god I don't have to be the person to sit down and figure this out. They have the year-to-date, year to date, percent to date, period to date POR, sorry, don't know what that is. Period to date budget. Period to date budget percent, it just goes on and its got more little figures in it than you can shake a stick at, and I'm sure someone very smart with this report together and I'm sure it means something to them but for me to look at it and be able to figure out what it means is that my fingers is not happen put this report together and I 'm sure it means something to them, but for me but to look at it and be able to figure it out in a snap of my fingers is not going to happen. And now we have this report, which will take a look at again later, its for the Fantasia cheese company and it's a startup, and they were doing too well at the time but that's understandable in a startup situation, and I mean boy did it's got got everything there including the kitchen sink, I mean its got all kinds of columns and rows and the highlights were put in when originally I was starting to work with it, but of course that's not their name. I am sure they got all the stuff for the budget and the variances in percent variances and I'm sure, sitting in offices somewhere, to try to figure things out from paper, this made a lot of sense to them, but I do want to clear: this is not required by the Generally Accepted Accounting Practices. All that's required is in, out, and what's left, basically. This is an example of really torturing a very simple elegant report in to try to get information out of that may or may not be successful.

Again pointing out that just because a computer can do something doesn't mean it should be done, here's an example of a proper loss that was statement that was done by hand. It has what came in, what went out and what if anything was left over which is what people investing in the company need to know, and what's covered by the guidelines. But it begs the question is what the investors and the bankers need to know in the financial reports the same thing as what the person operating the business day to day needs to know in order to make better decisions and that is exactly what we're going to learn for the rest the course: a way to be up the manage from real useful actionable knowledge.

And for the balance sheet which is extremely important for the owner of the company because it really was know with others still in business or not, but for operating businesses it really isn't that useful and actually it can confuse things if people look at it cause, unfortunately not everyone is completely accurate on their balance sheet for many different reasons. It does tell you have or what, in my point of view, and experience, what you said your stuff was worth, what money you should have been paid, that is, if everybody pays you on time like they are supposed to, what you were owed once, in the past, and what was left over once in the past: because it tells everything in a fixed point of time, and that's where the challenge comes in because, in operating a business object, it doesn't stop. It keeps moving forward in time, and certainly it's not enough to know what happened, and it's probably not even enough to really know what's happening right now though that's better. What you really need to know to manage is somewhere out here, looking at the road in front of you.

So let's take a look at a couple examples from docstoc. Here, you can see that it's really a personal balance sheet. It's a simple one, and it provides information at the owner or an investor would need to know about the value the company in a given moment in time. It has the assets; it has the liabilities, in other words what you say you have, an what do you expect to get paid by people, then what you say you owe and what's left over.

Now this is another balance sheet, and this is done much more to the standards; more of a professional one. You have your current assets, and which includes cash in the amount of inventory that you have based on what you say your inventory is worth. We'll get into the issue of what you value them, later, and then you have your fixed assets, based on what you say is current value market value, though what I found, in most cases, the stuff rarely sells for what people say it's worth. Then you have the liabilities ,what you say you owe, so again people play tricks with that depending on what their needs are, and then if you subtract liabilities from the assets you're left with the current shareholders equity.

And since this is a systemic report, relates to the whole system, actually things are related, so if your liabilities add up to more than the value which have; if what you owe is more than what you have; then you end up with less equity for the shareholders. If liabilities are less than your total assets, then you can end up with increasing equity to the shareholder; but the important thing is that the total of the liabilities and the equity has to equal exactly the total assets. That's why it's called the balance sheet.

So if you're not happy with my somewhat ironic and battle hardened version there's also very nice version from Quicken, and then there is the official version from the FASAB, which is: assets liabilities and net position. as opposed to have, owe, left.

And if you're curious or if you wear a pocket protector, and you can't believe that my version has any truth to it then, please please feel free to go check the FASAB or go to the Quicken website, I have the resources here, and you can do more research and see for yourself. And in the next section with and learn all of the different ways in which the profit and loss report in particular is used, and can actually hide and make more difficult to see what you need to know, and we're going to learn after that much better much more enjoyable way to see what you really need to do.

Once again I want to make perfectly clear I'm not dissing financial reports: well maybe I am, but only from the point of view of how to operate your business better.

Section 2: Data Presented Without Context Can Kill Success
What is this report trying to tell me?
05:27
The Fatal Flaws in Averages and Percents
09:58
The Slippery Slope of Limited Comparisons
08:06
14:52

Transcription:

Okay, are your ready? Fasten your seatbelts and grab your coffee cups, we are going to make the jump from two to four dimensions, using the American National Pastime, Baseball. (Yay sounds) We're going to move from limited comparisons in data tables, to sequential comparisons in time, as you move from two dimensions from three dimensions. And we're going to use the age old controversy of who really is THE HOME RUN KING!!!!

We're going to compare the number of career home runs hit by:

Babe Ruth

Hank Aaron

Roger Maris

Mickey Mantle and

Barry Bonds.

and tehn we are going to see how converting from three dimensions from a table to four using run charts, aka time sequence charts creates a visual that gives you much greater depth of insight into the data and makes it much easier to see what it it is trying to tell you. And we'll take a look at the problem of scale and that the rule "always look for the simples presetation that gives you the most genuine insight into the problem.

This is a table of data, an attempt to answer the age old question, who is the best home run hitter in history? And we listed the Babe, of course, Roger the Dodger Maris, Mr. Mickey Mantle, Hank Aaron and Barry Bonds.

It includes the season in which they played, now of course, only Hank Aaron, Mickey Mantle and Maris played at the same time so they are lined up by when they played. Barry played much later, some ten years after Aaron left the leagues and obviously the Babe played decades earlier.

If you look at this, it is interesting.... you can see the passage of time, how the homeruns progressed over their entire careers. And I suppose, with enough time, you could draw some very good insights out of this information. Unlike what we have seen in the past you have no "STUFF," just good hard data based on real things. So go ahead... I'll give you a few moments to look. If you stop the video, you can have as much time as you want. See what you can find in this table of data.

So how did it go? I am sure you could see some things because only the data that matters is here for you, no stuff, and in sequence in time. It still requires a lot of brain power though to extract the information that's there, so how can we visualize this so we don't have to think so much, so that the information that will give us insight is there because the context is there, visually . We think visually much more quickly than we think with words in our heads. Well.....

First step is to do a simple time sequence or "run" chart on your excel program they are called a line chart. Quite simply it shows you what happens to something over time, measured by the fluctuations in results. So right away, looking at this comparison of Babe Ruth and Roger Maris, though Maris did hit more than the Babge one year and one year only, it is quite obvious, in terms of his career, Babe ruth was far and above a better home run hitter.

So lets look at the next comparison. Which is to compare Ruth and Mantle... what fun! This looks different. What do you see? I don't want to influence you, so take a look for yourself. Ruth is in blue, mantle in red. I don't think it takes long to see that Ruth was a better homerun hitter than mantle, he moves ahead of Mantle. And you can see, this is again very interesting, wheras Ruth is higher than Aaron in most years that they played, Aaron was very very consistent and played for a very long period of time, only tapering off the last three years of his career, as you can see, Ruth began to taper off about 5 or 6 years before he retire, although, he still managed to hit quite a few homeruns as he tapered offf. But in terms of pure abillity to produce homeruns, it sure looks like the Babe is still the King, but in terms of longevity and consistency, it would be hard to top Aaron.

Now this is a very interesting chart. What you look for visually as you are looking at charts, is of course that the scale gives you a proper perception of what is taking place.. for instance if we put it at a scale of a thousand, it looks like they hit no home runs at all, conversely if you count each step from one to 80 it looks like there are huge jumps, but neither is true. It is the scale that makes it look that way , so you want to be sure when doing these to match the scale to the context of the information. I this is pretty good. As you can see, at one point only does Bonds leap out, and then a couple of years later he drops like a stone. Now, natural variation is pretty predictable, like a wave in the ocean it goes up and down but overall, mostly hovers around the center, and you can see that in this if you take out the top point and the low point of barry bonds you can seee that both ruth and bonds had a certain wavelike motion for their output of home runs. So when we see this wave like motion that doesn't vary too much, we call this common variation, natural, the noise: it comes from a whole spectrum of things and influences built into the process and it is just what Happens. But when you see out of the ordinary variation, like happens in the 16th and 20th year with Barry Bonds, there is a big jump up then a big jump down, that obviously goes beyond the normal form of a wave. that we call special variation, out of the ordinary: a signal.

All of his results pretty much range between an upper and lower limit, except for those two. The secret that most people don't realize is, that within those limits of natural variation, within the noise, one data point or another really doesn't make a difference, it is the way the chips fall, the way the "IT" hit the fan, and there is not much you can do about it without changing something fundamentally, but something had to happen that was out of the ordinary, beyond what was built into the process for the two outliers to happen. And if you compare Aaron and bonds, there is a very interesting insight. Whatever it was that influenced Bonds to hit so many home runs, then a couple of years later, so few, and it had to be something more than normal influences, and pretty easy to find, if because of it, they take away from him his standing in baseball and records it is a tragedy, because, if you trace with your fingers on the screen the flow of the line of Aaron and Bonds, go ahead, take you finger and trace it: it's amazing how simiilar they are isn't it? Barry Bonds and Hank Aaron were very close as players over the career, and what an exceptional Ball player BArry was, without having to take the leap for the prize he did, and since the dynamics within any wave like process or system always win, you can attribute the lowpoint to the system righting itself and bringing things back into the wonderful balance in output that was Barry Bonds.

This is a classic example of what you are looking for if you are managing a process. Lets say, in a moment of great foolishness, they made me a manager of a baseball team, I would want to be able to predict what the players are most likely to do going forward, and in this chart, if you take away the high and low of bonds, given their longevity and homer run hitting power, I would salivate at the mouth to have either of these two guys on my team.

And if you're a manager, and running your business, when you see special causes it is a signal and that signal is telling you "YOU MUST DO SOMETHING, AND NOW!" You need to figure out what the cause of that signal was, and do something about it or you will allow chaos into the system, on the other hand, all of the other points that you see is the NOise, and though you can use it to predict future behavior, there isn't really much you can do to influence it because it is made up of so many complex causes, it is natural to the system and without fundamentally changing the system, overall, you are not going to get any improvement in that behavior, and by shooting from the hip, winging it, reacting without understand it, you will only make things worse. So, one of the things these visualizations can tell you is what you can do something about, the signals, and things you are better of just leaving alone and letting it run, which is the noise.

Unless you are willing to invest the time to really sit down and figure out how to improve. And now we will look at how you present the data affects your understanding and how you look at, arrange the data, can give you very different viewpoints, and reveal meaning that you might very well miss otherwise. Here we have Roger Maris and Mickey Mantle in sequence from the first year the played, well Mantle played 18 and Maris only 12. And what you see with this right away, Maris had one year with more runs than Mantle, but Mickey overall was a better homerun hitter, and that's good, right?

But wait a minute! Roger Maris and Mickey Mantle played on the same team, the New York Yankess, and at the same time. And when you change the bottom line to where your match the actual years played, look what you get:

Here, starting in 57 both players started playing... it's amazing isn't it. It is really interesting. Obviously, there is something unusual, and out of the ordinary in what we are looking at. There appears to be some kind of connection between these two players and their output of homeruns. This too is exceptional because natural, random variation is random and this doesn't appear to be random.. there is something there. And if you looked into it, you would find they mostly batted three and four in the batting order, with Mantle aptly acting as clean up man. (Had to wikipedia it... I forgot despite having seen them play.) So if you didn't pitch to Maris, you had to pitch to Mantle or vice versa, and this went on for a period of time. We can clearly see that their home run output over their careers was profoundly influenced by each other, defined by their relationship to each other. We call this a correlation. And that is somehting you simply could not see unless you put the data into the right visual context.

Now, even by visualizing, even though you could undestand things instantaneously by showing them visually in a way that brings out their real context. You can also have too much information in a visualization as well. but the best way to look at it and compare it is in the way it can be reasonably see: the simplest possible presentation that gives you the most insight. So here we have all six, and we have the table so we can go back and refer to the data. just in case, in managing it, you want to be sure a mistake wasn't made in plotting the data, or you want to go back and research what you are seeing the chart and having them together gives you the best picture, so I'll leave it up to you to solve the problem: who was the greatest home run hitter of all time?

Section 3: A Brighter Future
Stop Looking in the Rear View Mirror
08:26
01:18

Thank you again, and be sure to click on the link to get your discounted copy of the course "Understand Your Business, Earn More Money" which will take you deeper into this amazing knowledge, step by step until you've aced it!

And again, feel free to spread the word to friends and colleagues about the course, and please, if you wish, give it a review.

4 questions

A final quiz for those who want to test their mettle, and their memory.

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Instructor Biography

Dan Strongin, Past President of the American Cheese Society-Chef and Coach

I bring many years of experience along every step of the food chain from farm to table, sharing my experiences, making people smile, helping people enjoy life more, and make great products profitably. My life's work has been about enjoying, nurturing, collaborating and cultivating in harmony with Nature.

A former 5 Star Chef, including 8 years with the prestigious Ritz Carlton Corporation, in the 1980's I pioneered the introduction of restaurant quality food to the Supermarket Industry in Northern California.

I was President and Chairman of the Board of the American Cheese Society, and am a founding member of the Deming Collaboration. In the 1990's I worked behind the scenes helping to plant the seed and cultivate the renaissance of high quality, local foods, from family farms in the US, working with, among others, the California Milk Advisory Board, The Extra Virgin Olive Oil Alliance (EVA), and the Dairy Business Innovation Center.

He blogs on productivity in harmony with Nature and is a monthly columnist for the Cheese Reporter.

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