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This guy grew a company from two employees to 450 employees. And he ended up overseeing the team where they actually sold the business to TurboTax back in the day, the guys from Intuit. He's going to teach us some specific principles that we can all apply in our own life and business so that we can financially get on the right path to move from just surviving to thriving.
Remember , at Thrive15.com we all believe that knowledge without application is meaningless. So as you're watching today's episode, take the time to ask yourself, self, what do I need to do to uniquely apply these principles in my own life and business? Otherwise, today's episode will be more meaningless than ordering a Diet Coke with a burger with cheese and bacon and extra mayo and more burger and more bacon and more bacon and burger and more fries and a milkshake and then that Diet Coke.
Tim Redmond, thank you for being here. I know that you know probably more about accounting than what you want to know about accounting.
-Yeah, I studied accounting. It was my major, accounting and finance, because I knew I wasn't going to learn this on my own. I wasn't going to just be reading at night to learn accounting. So I forced myself to be in accounting.
I was going to learn management and marketing because I'm interested in that. But this, I put myself through accounting, got a CPA. So I'm a constant pain in the abdomen, like we talked about before.
-Well, here's the thing. A lot of Thrivers watching this-- very few people, I think, want to click on the Accounting tab and go, ah, man, this is--
-But they're here.
-Yeah, but these are terms we have to know. This is kind of like a glossary. It's just financial education. We have to know these basic terms, or we're going to run around with ignorance, which is no excuse. And we're going to have problems.
-Ignorance is extremely costly, especially with financial knowledge. If you don't have financial knowledge, you're not learning how to read your financial statements, it's going to cost you money, if you really don't understand what's going on.
-And the people are pumped. So here we go. We're going to dive into it.
We're going to talk about income statements, balance sheets, cash flow statements, computing your profit margins, budgets and profits, and auditing financial statements. Here we go, the fire hose of knowledge.
-OK, so let me start it, let me framework this there, Clay, because I know we're trying to cram a lot in.
-We have to look at financial statements not just as numbers. Well, I'm just not into numbers here. Well, you're not into what are those numbers? What do those numbers really represent?
The numbers represent your decisions, your procrastination, your activity, your discipline, your systems or lack of systems. The numbers are the net result of decisions and actions that you and your organization have taken. So they're very real. They're not just abstract. They're just the summation, the summary, of who you are and what you did in your business. That's all we're talking about.
-We're keeping score.
-Now, the income statement, let's start there. So the word income statement technically, as defined by my main man Webster, he says this. "In accounting, the activity orientated financial statement issued by businesses. It's covering a specified time, such as three months or a year. The income statement is a summary of revenue and expenses. It also lists gains and losses from other transactions, such as the sale of assets or the repayment of debt. Standard accounting rules govern the procedures for recording each item." What are we talking about?
-All right, so an income statement is really, to boil it down, is it records your sales of your business and the expenses related to those sales. That's all we're talking about.
-That's all we're talking about is the stuff we sold and the things that were expenses.
-Yeah, we're in business to sell stuff, maybe a service, maybe a product, a combination of both. We're going to record the sales of those things and the expenses attached to make sure we can get those sales done.
-So how do I go about setting up an income statement?
-Well, can I come to the board here?
-Yeah, do it, the czar of the telestrator.
-When we are talking about an income statement, we have to think about it being three main elements. We have the sales. And sales are what we sell.
Do I need to cover that again? Or do you think they understood that the first time around?
Sales are what you sell. It's the product or service. Sales are the money coming in to you. The expenses are the money going out of you. And that's the cost to make sure the sales actually happen.
And then what you have left over is you have the net income. Hopefully, it's a net income. If your sales is greater than your expenses, then you have net income. If your sales is less than your expenses, your expenses is greater, you have a net loss. And you're headed towards having fights with your wife and kicking your cat. Those two things happen quite a bit.
-Fights with your wife and kicking your cat, that's what happens when your sales are less than your expenses.
-That's right. So now we're going to go into an income statement. And an income statement, like Nate said, my good friend Mr. Webster said, an income statement is the activity over a period of time. It may be a month. It may be a day. It may be a year. It may be a decade. Whatever you want to do, you want to measure your activity. How many sales do you have.
Let's say that we had sales of $1,000 during our month here of recording this. Now, we have different types of expenses here. We have the cost of goods sold. And then we have the operating expenses here. And we're going to see this.
Sales is $1,000. Let's say that I'm selling desks. And let's say that I sold that desk for $1,000. But it cost me $300 to buy that desk. You got a little bit of a mark up. But hey, we're in America. We're going for the profit.
All right, so the amount of money that we have after we took the money it cost us to get that desk is $700. That is the gross profit. And I don't think it's very gross. I think it looks pretty. OK, so we want the gross profit to be as high as we can. We see here that we have a gross profit of 70%.
Then we have expenses. We have to hire people to sell the desk, to ship it over, to do all that. So let's just say we have expenses of $100. And let's say we have utilities. The utilities cost $150 here. And advertising, we spent $50 on that. So our total expenses right here are $300.
So what we have here is we have our sales, the cost to get that sales. We have gross profit. We have all of our expenses here.
We have expenses. It comes down $300 less the $700. We made a net income of $400.
-$400 on the desk that we sold.
-$400, right. Now what happens here, Clay, is a lot of business owners don't understand all the expenses that go into what it really costs you to sell this desk. Sometimes they'll say, well, hey listen, I bought it for $300, sold it for $1,000. I got $700. Man, I'm $700 richer. I'm going to go spend this $700.
-I see it all the time.
-And they don't understand all the other expenses that go into making sure you can sell that desk.
-Now, I just want to make sure, because this is what happens. Let's pretend just for a second that that desk that you sold was a Wookie themed desk. Like it has some kind of intricate designs on it, but it's a Wookie.
-It's got Wookies on it. Like, and so, the business owners, like--
-And that's a growing trend right now.
-Well, I'm saying this because this is huge. So the business owner will say, it's got engravings of a Wookie. I have taken a Wookie and carved it into the disk, and when you talk to the business owner, they are passionate about Ewoks and Wookies, and how they made this themed desk.
And then they won't talk at all about these numbers that you're saying here. Because we're like, but this is a Wookie themed desk, and there's no energy spent on looking at the costs.
-And so what's the main point here? How would we summarize that?
-Well, I guess what I'm saying is that it seems as though your saying is like, hey, it's great that we sold it, but we have to put some focus into writing down these numbers and knowing how much we really have left.
-We can't just be excited about what we're selling.
-Right. And there's a number of clients that you and I have both serviced, even servicing now, that say listen, I'm not into numbers, I don't know anything about accounting. I just know how to do my business, how to make more sales, and I'm not going to keep track of this. And we have had a number of people, because they did not know what the actual expenses going out, the expenses, the money going out, they're not keeping track of it.
There have been people that have been selling-- let's say they sold the desk for $1,000, and it cost them $300 here. They got $700 right here, but they don't realize that their total expenses, let's say their total expenses is $900. OK? And so they have a total expenses of $900. Do they have a net income or a net loss right here?
-They have a net loss of $200. They go no, no, I didn't lose $200. I made $700. Why? Because they're not keeping track of the numbers. If you're not keeping track of the numbers, you don't know where you are, you can't make any improvements on this.
-And another thing I would give an example of, I know the Wookie themed desk is one that personally gets me excited, but there's a lady I know, and she was out in the east coast, actually, and she did a phenomenal job with this, like, baking goods. And she talked for hours. I mean, hours of time can be spent talking about these intricate dessert items that you could sell.
But not even like, 10 minutes a week was given to the numbers. We're talking about hours, talking about how intricate the designs were, but no time looking at the numbers. And I think it's super important that in every business, that we have somebody looking at these numbers.
-How often, or how much time do you think a week that a typical small business owner with 10 employees or less should devote to looking at their numbers?
-I think if you have a system where you're keeping current with all the transactions coming in, all the sales, and all the expenses here-- like, if you use quicken or QuickBooks, or something, if you can pop that out on a weekly basis, and you can spend 10 minutes looking at it-- 10 minutes is all it is. I had one client last year that hadn't looked at their financials for years.
-And I literally had to step by step walk them through it. As a matte of fact, I was down doing a conference in Ecuador at the time, and so we're on Skype, he's up in Tulsa-- or actually, outside of Tulsa. I'm in Ecuador, and I'm showing him these financial statements, and how to read these financial statements, and he had never done it before. And they had broke even in their business for 13 flat years.
-He never looked at his numbers?
-He never looked at his numbers, so he didn't know how to make the adjustments to move this from a loss to a gain.
-Well, so, Tim, if I'm watching this, and I say, I'm coming to terms with the idea that I need to have an income statement, I feel guilty. I say, I have been focused on the widget, not focused on how much profit I'm keeping. What can I do? What is the action steps I need to do to begin utilizing this information?
-For most folks that have a relatively small business-- let's say 10 employees or less-- if you're not comfortable with knowing how to do this, I wouldn't take the time to learn it all yourself. It can be very frustrating. And you can throw the whole thing away. Not do it accurate. You want good information so you can make a good decision.
So I recommend there's all kinds of bookkeepers in any town. I keep a list of them myself for my clients. Because I run into people all the time that need a bookkeeper. And I got several of them to choose from. And I would recommend that you hire a bookkeeper, have them set up your books, and initially walk you through the financial statements over the first couple months, to actually walk you through to make sure you understand what you're seeing. I will do that with my clients.
Now, I'm mostly working on strategy or marketing or staffing, or all these exciting things. Packaging, pricing the product, and all. I work with all these things. But I'll also take time to just walk through the income statement with the customer, with my client, with the business owner, to make sure they follow and see what's going on. And they can analyze how healthy their income statement.
-So you'd recommend either I am a bookkeeper myself or I go hire one. You're saying you need to have somebody who's professionally trained to do this.
-Do not take lightly. Don't make this your cousin that read an accounting, heard about the accounting concept 25 years ago. You want to get a professional that really knows this stuff. Don't take this lightly here, because it will set you up well for the IRS, and make sure you're making good educated decisions.
So I'm recommending that they hire an expert to do this. And they can be all kinds of different rates. Usually an hourly rate of some kind. And it's not uncommon, if your business isn't too big, to spend $200 or $300 a month to make sure that all this stuff gets taken care of and you're set up well.
-I love it. Tim, I appreciate you making this simple and breaking it down and familiarizing us with the terms. And I think it really brings a lot of clarity to this big, scary word called income statement. So hey, thank you so much, brother.
-Very good. My pleasure.
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