An Intro to Financial Statements | for Ecommerce Businesses

0:44 Why accounting is worth learning

Here at LedgerGurus we understand the often untapped power of the financial statements for business owners.

As an accountant, yeah, I mean you could definitely say I'm like the queen of the nerds, and I definitely love the accounting side of things. But what I really love is business. So I founded LedgerGurus, I do love business. And because I love business I love accounting, because it helps me understand what's really going on in a business.

So what I really want you to take away from this video is a passionate willingness to understand how accounting can really empower you as a business owner to be more successful, and to begin to decipher and to become comfortable and fluent in the language of business, which is accounting, by the way.

So start with just kind of like, hey, I get you. I understand what motivates business owners, and most business owners do not start businesses because they love accounting. In fact, most business owners dislike accounting or are kind of frightened by the financial side of their business. However, making money was a very major motivation of why they decided to start a business to begin with. Maybe they also had goals that they wanted to change their lives, they wanted to change the world, they wanted to bring a product to market that they were really passionate about.

2:00

But as you guys know, business ownership is not for the faint-hearted. It's very difficult. And one of the most compelling reasons why people are willing to engage in that journey is because we have hopes and dreams that it will be financially rewarding.

So if making money was a major motivator of the reason why you started your business, but you're not willing to actually watch the benchmark of whether you're succeeding or failing at that initiative or not, then you are robbing yourself of a major tool you have to make sure that you accomplish the whole reason why you started a business to begin with.

I love this meme. I think they call this guy like the grumpy cat, and he's just so great. He's like great for so many memes, but this is one that I happen to be particularly fond of, because I love accounting, it makes people cry.

I do love accounting. I love accounting because I am a successful business owner because I speak the language of accounting, and every decision I make as a business is motivated by what my accounting is telling me. And I'm also completely aware of the fact that accounting makes people cry, which is why I started a firm that does it for people.

But even if you have an outsourced solution for your accounting, you still need to be able to read what you're getting back from your accounting firm. And you need to be able to dig in to the financial information to be able to make better decisions. So you don't get to be off the hook just because you've outsourced this.

So whether you're watching this video because you're trying to embark on the journey of doing it yourself, or whether you're watching this video because you want to be able to read the information better coming out of your accounting functions, I applaud you. And you are off to a great start.

3:27 The business owner's dilemma

So I want to talk about the business owner's dilemma, because if you don't pay attention to your financial statements you may end up wondering where all the money has gone.

This is another one of my favorite memes. Unfortunately the quality of this particular picture is not great, but you still get the idea, where it's just like, I have no idea. I have no idea where the money's gone. I have no idea why I'm making money. I have no idea if I'm losing money. I have no idea why I'm succeeding, why I'm not succeeding.

This tends to be a more compelling problem when people start to lose money, and that's when they start to kind of go into panic mode of, where's the money going. But usually by the time that happens, if you have not established good financial standards before that point, trying to create a financial system that allows you to then look at everything when you're already burning money, it's too late. It's too late for you to do that.

You need to be able to see the metrics and you need to be able to see the trends as they're happening, to allow you to take quick action. And that requires you to have established a financial system that allows you to be looking at how everything is happening in your business, day in day out.

4:33

So all of the questions, all of the things, everything you want to know about your business ultimately comes back to an accounting question. We're going to go into a little bit more depth about what some of those are and what kinds of questions it can answer.

But I just want to make it clear right now that trying to run a business without financial statements is like mac without cheese, Romeo without Juliet, a house without walls, a ship without a rudder. Basically, if you're going to run a business you need to become financially literate, or else you will be missing a huge opportunity, and you will be putting yourself at risk, and you will be robbing yourself of the ability to become as successful as you possibly can. Because it all comes back to the information that your financial statements are giving you.

5:20

So why don't people utilize their financials? This is a very common problem.

I was in a group with a bunch of business owners, kind of a networking group, a couple years ago. I think there was like 30 people in the room that were all business owners of all various sizes. Of all of those 30 people in the room, there was probably three people in that room that were really comfortable speaking financials, and everybody else was literally on some scale of completely dismissive or flat out terrified about the whole thing.

So why do people not utilize their financials, if it is the single greatest tool they have available to their business for success?

It may be a lack of time, that they're not prioritizing it as something that they dig into, and they don't have the time to actually create the financial information. There's definitely things that have to be done to prepare and create financials.

It may be that they just have a lack of know-how. Like they've heard of QuickBooks, they've heard of accounting softwares, they have no idea how to utilize it, they don't have the time to dig in and figure it out.

Or they have a lack of understanding. A lack of understanding of why it's important, a lack of understanding of why it should be a priority for them, lack of understanding of how it can empower them as a business owner.

6:29

But really everything eventually comes back to your financial statements, to what they have to say. So I hope that I'm driving this point home effectively enough. But what I'm really trying to get at is that every single thing within your business, the past, the present, and the future, is evident by good financial records.

You can see where you've been, you can see where you're at today, and you can see the trends of where you're going, if you're keeping financial records. Otherwise you are flying completely blind. And I don't know about you, but it does not give me a high degree of confidence to fly blind.

7:00 The questions financials answer

So what kinds of questions can your financial statements answer?

We have clients, because we also work with clients from a CFO and advisory capacity, we have clients all the time that want to ask us questions about the direction their business is trying to go. So things like, do I need a loan to invest in more money? This is a very common thing when companies are ramping up for big selling seasons, like the coming Christmas season, or Black Friday, or Chinese New Year, like big selling time frames. Sellers will say, you know, do I need to take out a loan for inventory?

Can I afford to hire a warehouse manager? Can I afford to hire a COO? Can I afford to hire an accountant? Can I afford to hire, like all of these questions, can I afford to hire, are all accounting questions.

How much should I spend to open a new warehouse? How much can I afford in rent? How much can I afford in benefits for my employees? All of those questions, also accounting questions.

How much should I be spending on my marketing? What kind of return am I getting on marketing? Am I getting a good return? What is my return on ad spend? How much can I afford to spend on marketing? All of these questions, also accounting related questions.

8:08

So the next thing we're going to talk about in this video is, I'm going to introduce you to the financial statements. I'm going to take you into QuickBooks. I'm going to show you where to find these financial statements. I'm going to talk about how each of the financial statements are built.

But I want you to remember that this is one of four videos. There's going to be three more after this that are going to go into a lot of depth with each one of these financial statements, and I highly encourage you to find those and watch them. Because this one is designed to give you the vision of why you should care, but those ones are really the ones that will educate you on what you're looking at and will hopefully help you become more comfortable speaking the language of accounting.

8:45 The three financial statements

So let's dive into the first part. So first of all, there are three basic financial statements that you need to be aware of.

The first one is the profit and loss, and the profit and loss is also called the income statement. And it is basically where you are looking at all the money that you've made, all the money that you've spent, and what you have left over at the end of the day. It's probably, as far as running the day-to-day operations of your business, it's the most valuable of the financial statements when it comes to just digging into why you're succeeding or why you're failing.

The second one is the balance sheet. The balance sheet is where you're going to see all of your liabilities, all of your assets and all of your equity. And it's also going to be where you're going to come to understand where you stand as a business, and what the equity is that you've created in your business, how much your business is worth. How likely you are to go out of business is usually reflected on your balance sheet. Like how likely you are to go bankrupt, or to experience some sort of cash crisis, is evident from your balance sheet.

The last one is the cash flow statement. So the cash flow statement is really where it all comes together. It has aspects of the profit and loss and it has aspects of the balance sheet that all come together on the cash flow statement. It's probably the most useful of all the financial statements, but it's frankly the least utilized, because it can be the hardest to read. But I'm going to solve all of that for you, and we're going to go into a lot of depth about how to read it and how to get good information out of it, so you feel like you're ready to roll.

10:17 Why QuickBooks Online

So let's go directly into QuickBooks Online. So the first thing I want to talk about really quick is why I am a fan of QuickBooks Online, and why I'm taking you into the QuickBooks Online world.

So first of all, if you're a seller in the United States, QuickBooks has the majority of the market share. So it's a platform that is highly supported by a lot of vendors and a lot of accounting firms, and you're really in an ecosystem that's extremely stable and well supported. The apps integrate really well. The community puts out a lot of information about how to use it. There's tons of YouTube videos, there's tons of blogs. You just have a lot of resources if this is the platform you choose. But it's not the only platform, and what I'm really recommending is that you just choose a platform.

The other reason we like QuickBooks Online over QuickBooks Desktop for the ecommerce seller is because your business is online, and therefore your accounting should be online also. And many of the workflows that you guys are doing just work better within the online world than they do on a desktop. So we encourage QuickBooks Online for ecommerce sellers for a lot of reasons.

We have other videos, by the way, where we go into a lot of detail about QuickBooks and how to utilize QuickBooks and where you can find everything, but this specific video is really just about the financial statements.

11:41 Finding the reports

So this is where you find the financial statements inside QuickBooks. So you're going to come over here and you're going to click on where it says reports, and click on reports.

So the funny thing is, a lot of businesses that keep their books in QuickBooks Online are not even aware that this world exists. They don't know about the reporting center, and it's because they live in the banking feed center where they're just doing the transactional coding, and they're not even aware of this.

So this, by the way, is the entire purpose of using some sort of accounting platform to do your accounting. Because you do the transaction coding, and all of these reports are like magically created as a result of the day-to-day activities that you do. This is why it's so much better than, say, using Excel, for example. Where sure, in Excel you can keep track of transactions and you can even kind of get an idea of how you perform as a business, but it's a lot of work to do it that way, and there's no real efficiencies within that workflow, and the financial statements are not just created as an end result of all of that.

12:39

So I recommend that you create as favorites the reports that you're most likely to use most often. So the profit and loss and the balance sheet. Accounts receivable summary, in fact I'm going to deselect that one, because for an ecommerce business accounts receivable is not really that big of a deal.

But these are all of the reports down here, and you can pick one that you do want to see. So let's say that maybe I do want to see my journal entries, because I feel like I'm constantly looking for that. Or actually let's do the statement of cash flows. So now if I favorite this one, if I click it and turn it into a favorite, then it will show up here as well. So now I have all three of the major financial statements all here. The balance sheet, the profit and loss, statement of cash flows.

All of these other reports are all very useful too, but they're more like, just they go deep on something else, or they kind of shed light on a different area. We use a lot of these all the time, we find them very valuable. But these are the three that I highly recommend you get really comfortable with. If you get really comfortable with these, you'll be able to easily understand the rest of these as well.

13:51

So the first one, the profit and loss. Now I'm not going to go into a ton of detail right now about what this is. We're not going to go through all the line items. We are going to do that, by the way, in the next video, where we go deep on the profit and loss. I'm just showing you right now where to find it.

These financial statements are all created, as I said, as a direct result of the daily activities that you or your accountant does as part of the accounting process. Balance sheet, statement of cash flows, these are all going to be right here.

15:00

So in our next videos we're going to go in depth about every single one of these, all the parts and pieces of it, talk about the kinds of questions they'll answer, show you how to set them up to see different trends and how they operate, help you learn how to interpret them, help you understand the structure of them, the parts and pieces of them. Pretty much by the time we're done, our goal is that you are very comfortable, and that all of this makes sense for you, and that you have a high degree of confidence going into your financial information.

Okay, so back to our PowerPoint presentation. Back up one slide.

So really accounting is the language of business, and I want you guys to be committed to becoming fluent in this language. If you will dig in and learn how to read the financial statements, create them correctly, utilize them, manipulate them to show you the data that you need, it will empower you to be a much more successful business owner.

If you'd like some indication of whether your financial statements are set up correctly and effectively, and or whether you're in good hands with your current accountant, or whether you're just doing a good job yourself, you can download our PDF, 5 Signs of Bookkeeping Trouble with an Ecommerce Business. The link is in the description below.

If you are approaching one million dollars in annual sales and you are struggling with your ecommerce accounting or bookkeeping, this is where LedgerGurus can really help. Contact us at ledgergurus.com and we will have a discussion about what it would look like to have us support you with your success and support you through your next phases of growth.

If you liked this video, hit the like button, be sure to subscribe and share with all of your ecommerce friends. They will thank you for it later. Comment below with any questions you have, and thank you and have a nice day.