Monthly Archives: March 2013

Understanding your financial statements: Overview

I frequently meet with budding consumer products entrepreneurs who ask me questions about finding suppliers or talking to stores or getting press. Rarely does anyone ask me to help them understand their financial statements. And by rarely, I mean never.

As industrial designers, learning how to use financial statements to guide business decisions is just not a competency of ours. Financial statements are emotionless, brutally so. They lack nuance. They reduce the richness of our work to heartless black-and-white numbers. Moreover, we fear that the numbers will tell us to stop doing something when we know in our heart of hearts is the right thing to do, even if it isn’t making much money (yet).

Envisioning the future comes easily to me and is enjoyable, while addressing reality can be tiresome. As a business owner, you must be able to do both, and the objectivity of financial statements makes them useful for evaluating the “reality” piece of the equation.

The three main financial statements are:

  • Profit & Loss Statement (also called Income Statement)
  • Balance Sheet
  • Cash Flow Projections

I’ll devote individual blog posts to these different statement types, but here’s a quick overview of why you should care about each one, with a relatable example to illustrate how they work together.

Profit & Loss Statement (P&L)
I think this is the easiest one to mentally grasp. Basically, it takes your sales and subtracts your Cost of Goods and overhead expenses, leaving you with your net profit.
Why a P&L is useful: If your net profit is a negative number, you’re losing money, which is unsustainable.

Let’s say you graduated college and got a decent job that pays $4,000/month.Your monthly expenses are $3,000/mo., giving you an extra $1,000/mo of “net profit”. If you were spending more than you were making each month, you’d have to borrow money from mom & dad or use credit cards to keep going, neither of which is desirable for very long.

Balance Sheet
I think of the Balance Sheet as describing the overall “health” of your company. It summarizes your assets (things you own, like cold cash or inventory) and liabilities (things you owe, like loans).
Why a Balance Sheet is useful: The Balance Sheet shows you if you are healthy through and through or if you are actually sickly but clean up nice. If you are carrying a lot of liabilities, such as loans, you are being weighed down by debt, even if you are showing a profit on the P&L.

In our scenario from above, I forgot to mention that you have a $50,000 school loan debt and $10,000 in credit card debt. So, despite making a $12,000 “profit” each year, you are still in the red overall since you owe $60,000 to other people. The debts don’t show up on the P&L, so you need the Balance Sheet to get the full picture.

Cash Flow Statement
As a small company, your vendors are going to want you to pay upfront and your customers are going to want to pay you late. That means that even if you show a profit when all is said and done, there will still be times when you don’t have the money you need to pay the bills just because of timing.

Why the Cash Flow Statement is useful: If you look at your statement and see that things are going to be tight in, say, March, you can plan for it by asking for better payment terms from certain vendors or delaying purchases.

In our real-world example, this would be like deciding to use $4,000 of your annual $12,000 “profit” to book an awesome vacation for you and a significant other in February. At the end of the year, you will still have $8,000 profit leftover, but February will be tough since you still have to pay your normal living expenses.

 

This took me a couple of years to wrap my head around, but I think it would have been useful to internalize them earlier. Please leave questions in the comments below and I will answer to the best of my ability!

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Creating my business in my own image

let-my-people-go-surfingI recently read “Let My People Go Surfing: The Education of a Reluctant Businessman” by Patagonia founder Yvon Chouinard. There were many parts of the book that I found inspirational and informative, but perhaps the lesson that stuck with me most was how strongly he carried his values through to his company. Of course this includes the company’s famous environmental policies, but also how the company manages its finances, the relationships it builds with its customers, the benefits it provides its employees and on and on. Sure, some aspects of Patagonia’s culture may not be as close to his heart as others, but it is clear that he built Patagonia to be an extension of the things that he cares about through and through.

Then, today I read an interview with Cadence Dubus, who owns the Pilates studio Brooklyn Strength. In explaining her commitment to creating an eco-friendly space, she says, “If you’re going so far as to open your own business, that is such a statement about your beliefs. I would hope that every aspect of that would be as close to my values as possible”.

This really struck a chord with me because it acknowledged that starting a business requires a lot of courage and commitment and you don’t just do it willy nilly. But, strangely, I never thought about how the business you start is an automatic reflection of yourself. Why did this seemingly obvious thing never occur to me? Maybe because the start-ups you read about nowadays are high-growth tech companies intended to be sold as quick as possible, thus having a fingerprint of the founder is not necessary, if not undesirable. Or maybe it is because I always pictured Po Campo living on beyond my involvement, in which case I would not want the whole operation to lose its sense of identity without its founder. Possibly it is because I started Po Campo with a dear friend, and since it was “ours” it could never be “mine”, or “me”.

Regardless of the reason why I never thought about how my personal values should be shared with my company, my new “flex time” policy showed me why it is important. Declaring that no one has to come in to work when they don’t want to as long as they get their work done was my biggest managerial statement to date. And experiencing the freedom of not having to come in to work every day is incredibly liberating and joyful to me. I finally saw for the first time just how cool Po Campo could be. Po Campo can become my dream company to work for, and for others who share a similar idea of how a dream company should behave.

Sure, there are certainly other aspects of myself that the company has already assumed, like a persistent frugality, a certain mellowness, a respectful position towards others. But now I’m thinking of things that I always thought that we would do later when we had more time or money, like recycling or volunteer work or decorating, but now I am thinking we should just do it now. Those things are important to me, would be a part of my dream company, so what am I waiting for? I want to start working at my dream company today.

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