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.


 

 

 

 

Lighting a Fire

A few weeks ago, I happened to start a conversation with another parent at my daughter’s lacrosse game. He’d been out of work for a year and was depressed about running up against the corporate HR wall and never even receiving a response to his resume. His nest egg was running out and he had just stopped looking. I decided to start talking about positive actions that he could take to jump start a job search.

First, since I have an HR background I recommended that he go straight to the Manager of the department he wanted to be hired into. I told him to do the research and connect with that person to see if they have any openings. This is where a personal network becomes most important. If you have a good reputation in your industry you can use that network to see who knows this person and help get you in.

Our discussion evolved into “thinking outside of the box”. What directions had he not pursued? One was working as a consultant for companies in his industry. When he spoke about the industry he was energized, he was passionate about safety and loved working with architects. I asked him questions about the network of people he could tap into for potential business.

Could he consult for building owners who need his expertise while they were bidding out that part of their construction? He could be paid for his knowledge. He remembered a contact who was a safety expert but wasn’t a good salesman for his services. Could he partner to bring in business for that expert?

The ideas started to come fast, I could see a light go on and felt that a spark was lit inside him. He really understood when I was told him about Free Enterprise Warriors and our vision for entrepreneurs to “shift” away from their old mindset and see where their passions and interests might take them.

It felt great to help make a difference in the way he was feeling and thinking. A week later his wife came up to me at a game and said “thank you” for helping him to get refocused on the job search. In fact, she said, they had become accountability partners, were feeling closer together and taking positive steps toward his “shift”. Both were excited about where this was going to take them. So please remember that a sincere and caring conversation can light a spark for someone else and yourself.  Try it!

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!