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There are three accounting reports that every business owner should understand. Profit-Loss, Balance Sheet, Statement of Cash Flows. Most small business people

There are three accounting reports that every business owner should understand. Profit-Loss, Balance Sheet, Statement of Cash Flows. Most small business people that I have met only look at the Profit-Loss (P&L) and do not look at the other two. They are the three legs of a stool. The P&L tells you how much money you made (or lost), the Balance Sheet tells you what the balances are on your accounts (bank balances, monies owed to you and monies you owe to others), and the Statement of Cash Flows tells you where and how the Balance Sheet changed and where the money moved to. If you are C level at your company, spend at least an hour a month understanding these three reports. If you don't understand something ask your accountant or Google. As the OP says, there are more than just employees jobs riding on these reports (or what they represent); their families are also depending on good numbers. Sometimes the reports are not good news - they key is not to fool yourself, but to understand the truth. If you understand the truth you can make better decisions. If you do not understand the truth, it is very hard to make a good decision. Some days you are making money, but you have to wait for accounts receivable to get paid. Some days you have a bunch of money in the bank because of new funding, or a customer pre-paid, or you haven't taken care of all the payables yet. Just don't lie to yourself, and don't get lied to. It is not that hard to understand the three reports; they are basic arithmetic and counting - the key is to just do it. Personally, I look at it every week after doing payroll. You can choose your own schedule, just choose one and look at all three reports. Even if you only do it quarterly, you will at least know what is going on.

socialist_coder 13y ago
It blows me away that that C-level staff would either ignore or not have the smarts to understand these basic reports. The recent story about the parenting ecommerce store (I forget the name) where the CEO didn't understand the financial reports was crazy. It's high school level math!! How can you feel good about making decisions when you can't even do the basic math to figure out if you're gonna be profitable or not? How do these people get to their position without being able to do that type of stuff?
- auctiontheory 13y ago
  Richard Branson claims to not understand basic financial statements.
- efsavage 13y ago
  > How do these people get to their position without being able to do that type of stuff? Typically by hard work and good fortune. A non-accountant/non-MBA has a good idea, starts making money, hires a few friends, and tada, a person who has never read a P&L, never mind the more arcane reports, is now a CxO.
- gregpilling 13y ago
  The audience of HN is programmers. Why would you be amazed that someone could code up a success, and then have a bunch of employees and an accounting department before they knew it? I have known Phds that had no experience reading financial statements of their companies. It is not that they CAN'T do it; it is that it has never been a priority. In any small business (tech or not) there are always many, many things to do.. so my advice is simply about which of the hundreds of reports that your accounting software spits out that you should look at. To be honest, I did not look at Statements of Cash Flows for the first 10 years I was in business. It is less essential to watch SoCF if you are doing Cash accounting instead of Accrual accounting, and if you have positive cash flow it is not as dangerous to ignore it. But when the crap hits the fan, you should know what is really happening. The OPs post was about a business in decline.
  - loganfrederick 13y ago
    The problem is that businesses live and die on making money. Accounting keeps track of your money, and by my made-up-but-probably-true commutative property, accounting keeps track of your business. If you are managing a business, you should be managing accounting by default.
  - hga 13y ago
    If you're starting a business, especially if you're a programmer who's not afraid of basic math, shouldn't you spend a day or so learning the basics of accounting? Granted, that might not tell you to "watch cash flow like a hawk", but ... say, the moment you either have a paying customer or hire an employee, you have a minimum duty to not crater your company out of sheer ignorance of the basics.
prakster 13y ago
There is a fourth thing to know as well: Off-Balance Sheet Liabilities, which can sometimes be so large that they make the other 3 reports seem like a joke. (For example, Google 'Netflix off balance sheet liabilities').
- marcosdumay 13y ago
  Well, put your liabilitites into your balance sheet. It's your company, the only one you'll fool by taking them out is yourself. And you are a fool if you want to fool yourself. But yeah, if you are investing in other people's companies, you must seek those.
  - jacquesm 13y ago
    There are serious problems for failing to disclose. Of course that doesn't discharge the buyer that doesn't look for them but as a seller you also have obligations.
pjungwir 13y ago
As a programmer, not an accountant, a great book I enjoyed reading is Financial Statements by Thomas Ittelson. He walks you through all three reports as someone running an applesauce factory. The great thing about this book is it explains not just what each line means, but why you should care and what common kinds of trouble you can get into. It explains why some lines matter more for one kind of business than another. It's a great introduction!

socialist_coder 13y ago

It blows me away that that C-level staff would either ignore or not have the smarts to understand these basic reports. The recent story about the parenting ecommerce store (I forget the name) where the CEO didn't understand the financial reports was crazy. It's high school level math!! How can you feel good about making decisions when you can't even do the basic math to figure out if you're gonna be profitable or not? How do these people get to their position without being able to do that type of stuff?

auctiontheory 13y ago
Richard Branson claims to not understand basic financial statements.
efsavage 13y ago
> How do these people get to their position without being able to do that type of stuff? Typically by hard work and good fortune. A non-accountant/non-MBA has a good idea, starts making money, hires a few friends, and tada, a person who has never read a P&L, never mind the more arcane reports, is now a CxO.
gregpilling 13y ago
The audience of HN is programmers. Why would you be amazed that someone could code up a success, and then have a bunch of employees and an accounting department before they knew it? I have known Phds that had no experience reading financial statements of their companies. It is not that they CAN'T do it; it is that it has never been a priority. In any small business (tech or not) there are always many, many things to do.. so my advice is simply about which of the hundreds of reports that your accounting software spits out that you should look at. To be honest, I did not look at Statements of Cash Flows for the first 10 years I was in business. It is less essential to watch SoCF if you are doing Cash accounting instead of Accrual accounting, and if you have positive cash flow it is not as dangerous to ignore it. But when the crap hits the fan, you should know what is really happening. The OPs post was about a business in decline.
- loganfrederick 13y ago
  The problem is that businesses live and die on making money. Accounting keeps track of your money, and by my made-up-but-probably-true commutative property, accounting keeps track of your business. If you are managing a business, you should be managing accounting by default.
- hga 13y ago
  If you're starting a business, especially if you're a programmer who's not afraid of basic math, shouldn't you spend a day or so learning the basics of accounting? Granted, that might not tell you to "watch cash flow like a hawk", but ... say, the moment you either have a paying customer or hire an employee, you have a minimum duty to not crater your company out of sheer ignorance of the basics.

prakster 13y ago

There is a fourth thing to know as well: Off-Balance Sheet Liabilities, which can sometimes be so large that they make the other 3 reports seem like a joke. (For example, Google 'Netflix off balance sheet liabilities').

marcosdumay 13y ago
Well, put your liabilitites into your balance sheet. It's your company, the only one you'll fool by taking them out is yourself. And you are a fool if you want to fool yourself. But yeah, if you are investing in other people's companies, you must seek those.
- jacquesm 13y ago
  There are serious problems for failing to disclose. Of course that doesn't discharge the buyer that doesn't look for them but as a seller you also have obligations.

pjungwir 13y ago

As a programmer, not an accountant, a great book I enjoyed reading is Financial Statements by Thomas Ittelson. He walks you through all three reports as someone running an applesauce factory. The great thing about this book is it explains not just what each line means, but why you should care and what common kinds of trouble you can get into. It explains why some lines matter more for one kind of business than another. It's a great introduction!