Dollars and Sense

 

Financial Analysis may sound like a daunting task to some people, especially if the subjects have never really been explained to them in a common sense way.  I had an opportunity to teach a Finance student of mine what I like to call Common Sense Financial Analysis in 20 hours, and within that 20 hours, I’m confident he learned more than in four years at our prestigious local University.

Essentially we reviewed the three critical financial statements, the components of each, why those components were important, when a company reported, to whom they reported to, and essentially, what information you could get out of the numbers you were given.   Sure there are a million ratios and terms to make things sound fancy (like the beloved weighted average cost of capital) but common sense is where you start, and ironically, once you understand basics, the rest comes relatively easy.

 

Boiled down Financial Analysis:

 

An Income Statement tells you whether or not a company (through selling its goods or services) is making money or not.  Extended analysis will shed light on revenue trends, expense management, margins, consistency etc, but essentially it’s called a Profit and Loss statement because that’s exactly what it tells you:  during a period of time, did this company experience a profit or a loss.

 

Balance Sheet tells you at any given point in time, what a company owns, what it owes, and the difference, which is what it’s worth.    If your house was on a balance sheet, what you own (your asset) is worth say $100k.  What you owe (your liability) is $80k, and what you own (your equity) is $20k.  What you own, less what you owe, is what you are worth.   Assets- Liabilities = Equity.  Or on a balance sheet Assets = Liabilities + Equity.   They must equal so the sheet balances, hence the name.   Extended ratios from the balance sheet will tell you if a company is too leveraged (borrowing more than they should), has a good cash cycle (A/R and A/P analysis), Liquidity (can they pay their short term bills) and insights into ownership structures (is the company financed through stock, borrowing, owners capital etc).

 

Our third statement, a Cash Flow Statement essentially tells you, again over a period of time, what inflows (sources) of cash you had over that time, and what outflows (uses) of cash you had.  The interesting thing about a cash flow statement is it is created by the change of the balance sheet from one period to the next.  So, changes in what you own (buying or selling) would be uses or sources of cash.  Changes in what you owe (borrowing or paying off) would also be sources or uses of cash.  Changes in equity (selling stock, buying stock, and investing capital for example) are also sources and uses of cash.

 

As you can see, this is not rocket science, but you would be amazed at the number of financial and non financial people that can’t make these simple connections to their work and businesses.  The really cool thing about business financial statements is that they can be applied at a personal level as well.  You can calculate your personal ‘profit or loss’ for a given year, your personal net worth on your balance sheet, and your personal cash flow statement (changes in your balance sheet) over time.

 

Not understanding your financials is like driving with your eyes closed.  Sure you may be able to make it down the street, but I wouldn’t recommend the highway.


 

 

 

 

Speaking to the Point

Have you ever wondered why some people seem to make their point so clear and memorable? Here’s a tip I learned that has changed the way I communicate.

When you want to make a point, think in 3’s. Start with “The 3 most important things I’ve learned about…” or “The author makes 3 points in this article….” or “Our project was successful because we did these 3 things…”

When you do this, an amazing thing happens in your brain. Even if you weren’t thinking about the three most important things, your brain knows exactly what they are and organizes them for you.

And for those of you who might wonder what to do if after naming 3 there is a 4th, simply say “And if I had to include a 4th it would be ……”

This method will help you think clearer, hold people’s interest, and make a memorable imprint. It will also help you organize your thoughts so that you are more focused and confident.

The Master Motivator

For most of my adult life I have been fascinated by the idea of motivation.  In fact, my doctoral work in educational psychology, at the University of Albany in New York, was focused on “learning and motivation.”  I wanted to know what made people want to do things and how did they learn to do them. 

Recently, I read a very pragmatic book about workplace motivation: Daniel Pink’s Drive: The Surprising Truth About What Motivates Us.  He says that research points to three big motivators: autonomy, mastery and purpose.  I’ve memorized them by using the acronym: AMP.  These three things (Autonomy, Mastery, and Purpose) get us “amped” for action and achievement.

However, I think that just ONE of these three is really the key to high achievement.  Certainly all three are powerful motivators for taking action.  We all want to gain AUTONOMY: the freedom to do what we want to do, when we want to do it and in the way we chose to do it.  And, most of us look to follow a higher PURPOSE: to make a difference for and in the lives of others – friends, loved ones, colleagues, clients and the world we live in.

But, the key to high achievement, in my experience, is the middle one: MASTERY.  First, learning to master new skills, knowledge and techniques is inherently motivating. But even more important, mastery of the right things is what really leads to the highest achievements – in the arts, in athletics, in scholarship, in the professions and in business.  Those who make the greatest contributions must master the fundamental skills.  They must do it at the beginning and they must keep doing it along the way – continuing their mastery to an ever higher level.

In the end, if someone is not motivated by MASTERY, they may not fully gain AUTONOMY or fulfill their PURPOSE.  The willingness to put in the work, do the time, invest the effort and endure the failures on the path to mastery – that is what makes the biggest difference.  It’s walking the talk, putting rubber on the road, paying your dues and staying the course.

In fact, it is MASTERY that tells us what we are truly meant to do.  When we love the learning, the practice, the rehearsals and the feedback, we know we are in our “home zone,” our “sweet spot,” our “wheelhouse.”  If we’re bored with the repetition or tired of the labor – if we give up on the effort; we know that we are not doing that which is our true calling. 

We are best served when we seek those endeavors where we enjoy the work, the constant repetition and the slow but steady progress. 

That is the path to MASTERY – that is the big, sustaining motivator with big, long-term payoffs!