Josh Aharonoff
Aug 3, 2023
Welcome to a knowledge-packed edition of Legit Numbers!
Whether you're a Finance & Accounting professional, a business owner, or a fractional CFO...there's something here for everyone
This week, I show you how Finance & Accounting can be art by walking you through my famous Periodic Table of Financial Metrics, and ABCs of Accounting.
We'll then end with a deep dive into the popular world of Auditing.
What we’ll be covering in this edition:
How the Financial Statements are connected
How I build Dashboards
Master your Debits & Credits 👇
Let's dive in...
This Mindmap will give you everything you need to grasp the connectedness of the Financial Statements…
and that should come in handy…
as the Financial Statements are a popular topic in Finance & Accounting.
In fact…almost everything revolves around them
But how do they work? And how are they connected?
Let’s dive in:
➡️ The Profit & Loss
This statement is all about telling you what your income, and your costs
Your income is summarized by
1. Revenue → income related to your core business
2. Other Income → income related to none core activities (like credit card points)
Your expenses is summarized by:
1. Cost of Goods Sold → Costs that relate to carrying out your product or service
2. Operating Expenses → Costs that relate to operating your business
3. Other Expense → Costs that don’t relate to carrying out your income, or operating your business
The bottom line metric in a Profit & loss is your net income, which takes all income accounts, less all expense accounts
The P&L is a SELFISH financial statement…it pushes it’s data to the other 2 statements, but doesn’t care about any activities from the other 2 statements when presenting it’s information
Note - it’s common to have journal entries that relate to both the Profit & Loss and the Balance Sheet
➡️ The Balance Sheet
This statement tells you all about the financial position of your company
it is summarized by:
1. Assets → Amounts of Economic value that business owns, or substantially controls
2. Liabilities → Amounts that you owe to creditors
3. Owners Equity → Amounts that you owe to the owners
The Balance sheet is presented on a cumulative basis, which is the only statement of the 3 that acts this way
and it PULLS from the Income Statement via an account called RETAINED EARNINGS, which is a cumulative balance of your NET INCOME from your Profit & Loss
➡️ The Statement of Cash Flows
This statement is all about telling you where your cash is going
it is separated by:
1. Cash from Operating activities → this section relates to cash movements from operating your business
2. Cash from Investing activities → This section relates to cash movements from fixed & long term assets (IE, Assets that are invested into the business for long term benefit)
3. Cash from Financing activities → This section relates to cash movements from amounts invested by owners, or creditors - both for amounts put in, and amounts repaid
The Statement of Cash Flows is the NEEDIEST of all 3 statements…in fact, it doesn’t even present you with any new data!
It simply pulls from the other 2 statements, as shown in the mindmap below
That’s my take on the 3 Financial Statements, and how they are all connected
Got anything to add?
I’m a total nerd when it comes to this subject…
I even have an album on my phone of all the dashboards I’m most proud of creating 😅
But the truth is…it isn’t too challenging to create a good dashboard…
and with the right infrastructure, you can create one easily in excel
Let’s jump into my preferred method:
1. Import your data
This can be ANYTHING…
but the most common items to start with are your Profit & Loss, and Balance Sheet
You can also include other areas such as your customer data…
or your headcount data…
but the key is to import the information in it’s native format.
This way you can easily copy and paste each month with new data
2. Clean & Transform with Power Query
Before you can work with your data in a flexible & dynamic way…
it needs to be structured correctly.
That’s where Power Query comes in.
If you haven’t used Power Query….oh boy…you are missing out.
To summarize…Power Query will allow you to transform your data into any format that’s needed…
So that all you need to do is hit “refresh”, and it will present your data in the new format, while maintaining the source data’s format
3. Define your Variables
When designing dashboards, variables play a key piece.
Common variables can be ranges (profit & loss accounts)…
or specific values (start date, end date)
4. Enter your Date Selectors
The best dashboards are ones where you can easily toggle to different dates…
allowing you to see your data update in real time for whichever period you set to
5. Outline your first KPI with dummy data
Now comes time for the fun.
Start by including shapes, and populating raw text with where you want your data to go
6. Finalize your design
Now it’s time to make this prettier, getting it ultimately to the design that you want.
Don’t skip this step! We are creatures of design, and it can make the world of a difference
7. Populate your formulas
Now it’s time to connect your data correctly using dynamic formulas,
My favorite are:
∙ Index / Match
∙ Sumifs
∙ Sum Product
8. Replicate
Once you have it all laid out…
you should be able to just copy and paste…
allowing you to replicate your dynamic pretty designs with ease
That’s how I design Dashboards in excel…but everyone has their own take
What’s yours?
Debits & Credits can be a real challenging concept to grasp when starting off in accounting
They are pretty much a whole new language…and most people think they are too confusing to understand
But they are actually really simple
First..
➡️ What are Debits & Credit?
Debits & Credits are kind of hard to to explain because…well
They aren’t really anything
They are just a way of communicating what is happening to an account in your income statement / balance sheet (IE your general ledger)
They are the way you work with what is famously known as “Double Entry Accounting”
➡️ What is Double Entry Accounting?
This pretty much means that everything financially that happens to a business affects atleast 2 accounts in your general ledger
That’s right…every single financial transaction…
And those 2 “actions” are communicated via debits & credits
➡️ How can I remember when to use a Debit, and when to use a Credit?
OK…so this is where it can get confusing
But it’s actually really simple if you understand this formula
ASSET = LIABILITIES + OWNERS EQUITY
All financial activity affects one or more of these 3 sections of your balance sheet
and when using debits & credits…
The way Assets go up or down…
is the complete OPPPOSITE for how Liabilities + Owners Equity go up or down.
And this is all you need to memorize 👇
Assets —> ⬆️ go UP with DEBITS ⬇️ Go DOWN with CREDITS
Liabilities + Owners Equity —> ⬆️ Go UP with CREDITS ⬇️ Go DOWN with DEBITS
➡️ What about the Profit and Loss?
The key thing to remember is that Your Profit & Loss flows ⏩ into your Owners equity ⏩ through an account called RETAINED EARNINGS
So your Net Income goes UP ⬆️ with Credits
and DOWN ⬇️with Debits
Than means that any P&L account that’s GOOD for your net income (like Revenue)
Will go up by…..?
That’s right - a CREDIT
And things that are BAD for your net income (like COGS / Expenses)
Will go up by…?
Exactly! A DEBIT
What do you think? Was that simple enough for you to understand?
I hope you enjoyed this week's edition of Legit Numbers!
If you have any questions or need further assistance, feel free to reach out. I reply to all my emails personally :)
Till next Thursday!