I was one of those individuals who actually enjoyed school. I liked the structure of learning. There was an order to everything. There was time allotted for different subjects. I knew when I was going to be studying what. There was a way to measure my progress. Every day I would work at learning. Periodically there would be test that would gauge my mastery of the subject matter. If I got a bad grade on a test, I knew that I had come up short. This meant I would have to double down on my homework and make sure that I studied harder. At the end of each semester I would get a report card that would tell me whether I had done a good job in each of my classes. Usually, there were not a lot of surprises when I got my report card. I had been tracking my grades throughout the semester and I had a pretty good idea what the grade in each subject would be.
When you’re running a business you also have a report card. One of the purposes of a business is to earn profit for the owners of the business. I would make the argument that this should be the primary objective of a business. If a business isn’t making a profit than something is not working in the business. It could be any number of things. Maybe the business doesn’t have enough customers. Maybe the prices set by the owner are too low. Maybe the business is overspending on items that really are not important to the main objective of the business. Without looking at the business report card, it can be very difficult to determine what the cause of successes and failures are. One may have a gut feeling about what is wrong, but with out objective data, that gut feeling could be just a stomach ache.
The report card of a business are the financial statements. There are three main financial statements:
- Balance Sheet – the balance sheet reports what the assets, liabilities and net worth (also known as equity) of the business are.
- Income Statement (commonly known as the P&L or profit & loss statement) – income statement reports the total income, expenses and profit or loss of a company for a period of time such as a month, quarter or year
- Cash Flow Statement – the cash flow statement shows the sources or uses of cash in three activity categories of operations, investment and financing.