How I learned all about finance
When I first came to Brixx I didn’t know the first thing about finance.
But I did know something about small businesses and how they operated.
Within a week I was starting to understand that the Dark Art of accountancy wasn’t so dark, it’s just rarely explained in terms non-accountants understand. The reason why a balance sheet should balance, or the difference between retained earnings and opening cash is lost to most non-accountants. Business people and entrepreneurs see the world divided in different ways to the rules of accountancy.
I mentioned I didn’t know anything about finance. Something I do know about is philosophy. One of the coolest parts of philosophy is ontology, the study of existence and how we talk about what exists*. For most entrepreneurs I’ve met, their ontology does not include many of the concepts accountancy takes for granted…
“A T-account, what’s that?”
“What do you mean, it’s ‘unbalanced’? What does that even mean?”
These aren’t the sort of terms that you come across in the day-to-day running of a business. Here are a few more things that seem otherworldy when viewed through the lens of accountancy:
“What do you mean, I have share capital? I’m the owner… I thought that was it.”
“Well, I bought this computer, but the business uses it… does it belong to the business…?”
What we’re trying to do with Brixx is break down the barriers between how you see your business and how the business looks financially. With this in mind, it’s important to understand the outputs of your plan. Most non-accountants have a feeling they know what a cash flow report would look like, but the others are a bit vague…
There are three reports commonly used to present information about a business. Each shows the business in a slightly different light, and each is useful for asking different questions about the business:
A real picture of the cash the business receives and the cash it pays out. The Cash Flow shows what’s in the business’ bank account at any given time, and is a good measure of whether a business will succeed or fail (if you go cash negative, how will you pick up the bills and pay your staff?). It breaks down how real cash flows into and out of the business.
The Cash Flow includes a great line, “Income Less Payments” – this shows how much cash you make every month after paying all of your bills, employees, tax, loan repayments etc. Great for identifying high-cost, or highly lucrative months.
Profit & Loss
Sometimes called the I&E or Income Statement, this shows the profit generated in a particular period. It doesn’t take into account when cash is paid but when it is owed. It’s an accountant’s eye view of the business, what it should be like rather than whether the cash in actually in your pocket.
This makes it a useful tool for identifying and reducing costs and monitoring increasing revenue. It’s also going to be something investors will look closely at, as it is a measure of how their investment is likely to pay off.
The Balance Sheet is a picture of what the business is worth. It includes the assets owned by the business, the liabilities owed by the business and the amount of capital invested into the business by the owners/shareholders.
I mentioned T-accounts and what ‘balanced’ means in this context earlier. This gets quite complicated, but remember that its just another picture of your business. A ‘balanced’ balance sheet is one that takes everything into account, an unbalanced balance sheet has something missing.
To check that the balance sheet is balanced, accountants check that Assets (stuff the business has) minus Liabilities (stuff the business owes) equal Equity (money in the business). If this checks out, then the balance sheet is balanced. It’s a method of checking that everything has been included in the financial plan.
We hope that as you build a picture of your business with Brixx, you’ll see the relationship between your day-to-day business activities and the figures that make up your financial reports. Because at the end of the day, all of these accounting terms are just ways of presenting YOUR numbers. Presenting them in the right way is the hard bit, and Brixx does this for you.
Hope you’re having a great summer. Keep planning ☺!
* Submit a support ticket with “ontology” in the title if you have a bone to pick with this ☺
I learned everything I know about finance from working at Brixx, making financial forecasting software. Software that you can try today, for free, btw 😉