Business Acumen as it Applies to the Financial Statements
The Financial Statements:
The financial statements can feel a bit overwhelming. Especially if you're new to the business space and don't quite understand them. We're here to offer us some great advice on how to look at the financials in a simple way. Here is the transcript of the video:
Do you think you know the Financial Statements?
Test Your Business Acumen:
"Hi everybody! I'm Ben Cook, the president of Acumen Learning, and I'm excited that you'd join! I just wanted to take a bit of time and give you some fundamental language about how businesses think, act, how they talk, and how you would navigate financials really quickly. Now businesses fundamentally talk about five things: cash, profit, assets, growth, and people. And CEOs of every business, large or small, talk about these five drivers of business and how they interact with each other.
How Does Business Acumen Help you Understand the Financial Statements:
But then how does a company measure its success on these five drivers? They typically release the financial statements, and the financial statements that link with this five driver model. If you want to see a company's cash, and how it generates it, and where it puts it, you go to the statement of cash flows. If you want to go see how it manages its profitability, its cost, its revenues, or sales you go to its income statement. If you want to look at a company you know, assets, and liabilities, and equity, you go to its balance sheet. So you see that this five-driver model links with the financial statements really cleanly. This is kind of like an MBA in one graphic.
Now you look at these three financial statements that I'm showing here, they're actually only one statement that are broken up into three parts. And I want to give you kind of a 30-second view of how to look at these financial statements together, and as they link together, and how you find meaning from there. So I've taken a company, a company that many people know, it's very global, it's a very large company, I just chose one. Medtronic. A big medical device company. And I want to show you the link of these three financial statements together so that you can see the flow easily.
The Income Statement:
So the very first financial statement that goes in this flow is the income statement, or what Medtronic refers to as the statements of income. And the statements of income also referred to as the P&L. It starts with the sales of the company, you can see Medtronic had generated 31.6 billion, almost 31.7 billion in sales in this latest year, and then they have all of its costs associated with operating the business. And so the costs typically go in order from most connected to sales to least connected to sales. So you've got its sales. Then it walks through all of its costs, and what it has at the very end is net income or net profit. It's very very similar to your budgeting at home. Sales, costs, profit. And you'll see that out of the 31.68 billion they generate in sales, they had left over after all of their costs five almost 5.1 billion in profits.
Statement of Cash Flows:
Now where the P&L ends, the next statement as it goes in this flow starts. The statement of cash flows. So you'll see in that statement of cash flows, it starts with that 5.1 billion in net income, and then it does some adjustments on certain things. Right? It walks through from profits and then it turns those profits into - okay how much do they actually generate, what referred to as cash flow or operating cash flow. And there's various reasons on why there's a difference between profit and cash flow, but just know they generated about 5 billion in profits. And then you add back certain things like depreciation or other things and you get how much they generated in operating cash flow, which was about 7.3 billion. But then the question is what do they do with that money? Where did they put it to work? And they put it to work, some internally in things like capital expenses, and things like acquisitions, things like that. And then how much do they put in that cash flow externally? In things like dividends they would pay to shareholders, or stock buybacks that they also do as well. So the statement of cash flows starts with profit. Turns that profit into cash and then where they ultimately put that cash at the very end, it shows how much Medtronic had at the very end of the year in cash. So we start with sales, back out costs, and gives us profit. Statement of cash flows turns that profit, kind of adjusts for certain things to give us how much they generate in cash flow. And then where they chose to put the cash internal and where they put the cash to banks or shareholders, and how much cash they had at the very end of the year.
The Balance Sheet:
That's where the statement of cash flows ends which is where the balance sheet actually starts. Starts with how much cash a company has. And it talks and walks through all of the assets that Medtronic has. Starts with the most liquid assets down to the least. So it walks through from cash to investments, to things like inventories and receivables and it walks through all of its assets. Then it walks through all the liabilities it incurs and takes its assets minus its liabilities, then it ends with equity. Or what shareholders could lay claim to if they sold all the assets of the current value, backs out all the liabilities that they had to pay to those they owed, and how much left over is what shareholders would lay claim to which is what they call shareholders equity. And you can see Medtronic had about 53 billion in shareholders equity or also what they call book value.
Business Acumen and the Five Drivers:
So it goes from P&L to the statement of cash flows to the balance sheet. And it starts with sales, right? Customers right? The external people, you saw that people in that model before, it starts with people, with customers, and sales. It walks through the cost that gives you profit, turns that profit into cash, and that cash they put to work, and how much of all of those assets minus liabilities, their shareholders would lay claim to. So it starts with people, customers. And it ends with shareholders at the very end in total shareholders’ equity. So it starts with people and ends with people. And then what you find is everything that you and I and everybody else does to try to drive value to customers and value to shareholders and everything in between, are the decisions we make to try to drive value to the business. It's driving process improvements and operating efficiencies and innovation and finding ways to operate as efficiently and as effectively as we possibly can to bridge sales to shareholders and how we all operate together, is what drives shareholder value. So these are three financial statements in one slide a corporate finance class in one slide between P&L, statement of cash flows, and balance sheet to drive value for customers to shareholders. And there you go! Quick view of all three financial statements on one slide. Hope you enjoyed this, hopefully, this is helpful for you. Appreciate the time that you took. See ya!"
Frequently Used Financial Acronyms
Do you want to brush up on some frequently used financial acronyms? Continue your education and read this article:
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