How To Understand Financial Statements – Walkthrough – Dan Lok

(upbeat music) – Okay let’s play a game. Let’s what? Let’s play a game. Let’s put this into practice. Michael can you hand
out the first handout? We’re gonna look at a company together. And I’m only gonna give you some numbers. And what I want you to do is, I want you to look at those numbers. I want you to tell me what’s
going on with the company as a guru. Klaus hand that out. (all talking off mic) Yeah so everybody gets a copy. So taking what you’ve learnt so far, taking what you’ve learnt so far, and just look at the
financial statement and look at what’s going on. And I want you to get
what’s the story behind this company, what is going on. What’s wrong or what’s
good about the company too. Okay what’s good about the company, what’s the story, what’s
bad about the company? What’s happening? Do it as a group, let
me give you let’s say 10 minutes for that. Okay go on. (participant talking off mic) No I can’t and don’t get involved. No cheating okay? (participant talking off mic) Silence, mute, don’t help them. In fact if anything mislead them a bit. Just like tell them. (participants talking off mic) Don’t say anything. Awesome. (crowd talking) Yeah please. (crowd talking in low voices) Give your neighbor a hi-five
and say we can do this. – [Group] We can do this! (clapping noises) – Okay now. Okay, okay. So how many of you agree
this is a typical financial statement, right? Balance sheet, income
statement, density code. So now it’s okay to be honest, how many find this, if
you look at numbers like a little bit confusing, it’s okay. That’s how we learn yes? It’s perfectly fine. It’s not about right or wrong. It’s about learning together, about what? – [Group] Learning together.
– That’s okay, we’ll work through this together. So look at this like what does that mean? Looking at this, what could
you tell me about this company? What’s the story behind what’s going on? Yes Kevin. (participant talking off mic) Bigger space, because they what? How do you know that? Because the rent has gone up. From 2013 12,199 dollars, 2014, 48,000 dollars. Is it a small jump or big jump? – [Group] Big jump. – Big jump, possibly they’re
expanding too quick right? Okay so there’s assumption. So we’ll verify it in a second. So good, what else? What else is going on? – [Participant] They
have a lot of inventory. They have a lot of (mumbles). – Okay they have a lot inventory. Where do you see that? (participant talking off mic) On the balance sheet right? – [Participant] Yes. – How can you tell they’ve
a lot of inventory? From the first year 2013, yes, which is 223,000 somewhat dollars right? To 2015, 476,042 dollars
a lot of inventory yes? And also you mentioned that
they have a lot of what? – [Participant] Accounts receivables. – Accounts receivables. From the first year a
121,000 somewhat dollars, to 2015, 200 almost 300,000
dollar accounts receivables. Does that affect your cashflow, yes or no? – [Group] Yes. – Okay hell yeah. So a lot of inventory, a
lot of accounts receivables. Is that good? – [Group] No.
– No right? You can see, what else? (participant talking off mic) The what? – [Participant] The cash
on hand is dropping. – The cash on hand is dropping. Look, 2013, 34,000 dollars, remember I said a balance sheet is a what? – [Group] Snapshot. – Snapshot, so this only tells you what? What’s the date? – [Participant] September. – September what? – [Group] 30th. – 30th, it’s only that snapshot. So you look at 2015 December 30th. Only $2486. Where did all the cash go? (participant talking off mic) Yeah and also? – [Participant] Most of
the expenses have gone up. – Have gone up, yes, but lot of cash is what accounts? – [Group] Receivable. – Receivables, they have not collect. They have not collect. So is that dangerous? – [Group] Yes. – Running a company that’s
doing 900 somewhat thousand dollars in revenue, the
expense is $445,000. They have 2000 somewhat dollars in cash. That is not very good right? It’s not very good. What else? What else can you see? Good, so far, so good, good job, yes, yes. (participant talking off mic) – Okay not proper
maintenance for the inventory and equipment. Where do you see that? (participant talking off mic) So 2014 and you see that, where is it? The repairs and maintenance right? – [Participant] Yeah. – Okay so you see 2013
they’re spending 3000 somewhat dollars, 2104 they’re
not spending anything right? And then 2015, spending
600 somewhat dollars. (participant talking off mic) Yeah amortization is shot up
from first year 4555 dollars to 25,944 dollars, yes. So again we are assuming,
if they do better repairs and maintenance, you have better cashflow. Does that make sense? So you look at the two lines
and it tells you a story doesn’t it? Yeah, what else do you see? Great job, great job, yes. What else do you see? There’s a biggie here, come on. – [Group] Salaries. – What’s happening with salaries? – [Group] They’re double. – From a 100 and, first year how much? A 113,421 to 2015 how much? – [Group] 271. – 271, more than double right? So the expanding more inventory, more people, but look
at what’s happening with the gross profit? – [Participant] It’s dropping. – It’s dropping right? The percentage wise, yes. What else do you see? What else do you see? What do you see? (participant talking off mic) Yes, cost of sales, so they’re buying maybe too much. Too confident of what they want to do. They expanding versus instead maybe it’s nice to grow nice and steady. Maybe let’s grow sales first. Maybe we don’t have every
item that a customer wants, but we serve more cash. Does that make sense? Is that interesting? – [Group] Yes. – You look at these numbers, oh okay, we are just talking. It’s two sheets of paper. Have I told you anything
about the company? – [Group] No. – Do you know what the hell they sell? – [Group] No.
– No but you look at this company, I promise you, you look at this, you know awful lot about their business. Maybe more than the
business owner themselves. They don’t even know. Actually you look at that numbers, if you are the owner of this company, how would you be feeling? – [Group] Nervous. – You will be very,
very, you will freak out. But if you just listen, listen, but if you just look at
the income statement, if you just look at
the revenue, inventory, revenue is going up what? Every year. I must be doing a damn good job as a CEO. I should give myself a pat in the back. Look at how awesome I am. (participant talking off mic) Look at the retained earnings. Look at the retained earnings. Where do you see that? – [Participant] Balance
sheet at the bottom. – Where do you see that? – [Participant] Balance
sheet at the bottom. – Yeah, retained earnings, 2013 how much? – [Participant] 212. – 212, yes, okay. You are talking about percentage? Where this is going down? – [Participant] It’s going up. – It’s going up? So retained earnings is going up. What’s wrong with that? (participant talking off mic) It’s a biggie, give the mic to Ryan. By the way, let’s give
Ryan a round of applause ‘cos he’s the one that put this together. (participants applauding) TO help me out with this exercise. So Ryan is a CA from Pacific
Chartered Accountants. So it’s not fair. I asked him not to help at the table. This would not be fair. Ryan, have they pointed
out some of the problems that’s going on? – [Ryan] Yeah absolutely. – Let me ask you about, what
about due to shareholder? What’s going on there? Yeah. Yes, what’s going on here? – Alright so… – Look at number page two. – Yeah page two. – Yeah. – So due to shareholder
and like Adam was saying, retained earnings is going up. So he was saying, were
they hoarding on to cash. Well that could be true, but then you take a flip
side and look at this, the shareholder loan is actually going up. – So what does that mean? What does that mean? – [Participant] He is not getting paid. – Not only he is not getting
paid, what does that mean? – [Group] He is putting
in money into that. – He is putting in money into the business to keep it floating. So from 2013 to 150,000 dollars to then, an additional 100,000 dollars in the two years’ time. That is scary. (participant talking off mic) Yeah he also owns a big chunk. (participant talking off mic) To this company? – [Participant] Yes. – Okay that’s a question,
that’s a good question. So Ryan, what if, see look at this. Professional accounting. What if I wanted to let’s say I’m looking at this company here. And maybe possibly I want to buy it out. – Sure. – What would you advise me? – I would do exactly what
you’ve kind of done right now. Is your vertical and horizontal analysis, take a look at the percentages, see what’s going up,
see what’s going down. Take a look at a few of the main accounts. So inventory is pointed out. The inventory management is quite bad. In actuality, they’re actually
losing on profitability and losing on their sales
and are hoarding assets, which is terrible. He is bleeding money. He is taking on some short term debt. Due to shareholder loans increasing, you are thinking well that’s great. The company owes that much money, but he probably more used to his house, but the money in the
company in the first place. So now there’s all this
personal debt as well. – Yeah. – You’ve got account
payables which is growing. Big one actually he picked up
on was income taxes payable went up from 33,000. – Wait, wait, wait, so income tax payable. – Yeah. – Income tax payable, page three. – Income tax payable,
page three, take a look at the income statement. You see all those income taxes there? Then flip over to page
two on the balance sheet. It’s gone up. They’re not even paying
their income taxes. – Ah, Aha. Do you think the Revenue
Canada likes that? – [Group] No. – (laughs) Okay so you look at the numbers you know they’re not paying their taxes. So he is bleeding money,
have way too much inventory. Maybe mortgaging his house, putting into the company and he is not paying his taxes. Okay he is drinking a lot. (Ryan laughs) He is drinking a lot. – Let me look at as we go up for that. – Yes, yes sir. – [Participant] I’ve got two questions. – Yes. – [Participant] What does
account receivable mean? What does it (mumbles) – Yes please, what does
account receivable mean, yes. – Accounts receivable is
basically when you make a sale like we were talking with the 50% down and 50% still you have to receive is basically your sales,
you haven’t received in physical cash yet. So you notice his sales is going up. Looks great, like Dan was
saying it’s gone up to 900,000 but same time his AR is
also going up to as much. He is actually not
collecting on physical cash, which is bad, because some
of that he may never actually even collect on and
that’s called bad debt. Unless he has a good
collections department. – [Participant] What
does share capital mean? – Share capital, yes. – Absolutely, share capital. This is gonna be a little different ‘cos this is private company. We tailored this to look
like something that you guys look at for your own financial statements. Share capital that’s $12. That’s the value of your
shares that you purchased when you started your company. (participant talking off mic) – This is a private company. – Private, private yeah. – Public companies are being
listed on the stock exchange. Until most of you guys are in IPO, you’re gonna be private. – [Participant] I don’t
understand share capital mean. – Share capital is the
value of your shares when you incorporate your company, you have to have shares in your company. – You have to give it a value right? – Yeah. – How many shares you’re
gonna issue right? – You gave a 100 shares,
10 shares whatever. But they have a value
when you bought into them. – It could be a $1 share,
it could be a $10 share. – A dollar, 10 cents whatever. – [Participant] What does
a retained earnings mean? – Retained earnings. – So retained earnings, absolutely. Retained earnings, think of it this way. They’re the earnings that
are retained in your company, you have not pulled out yet. – They have not pulled it out. So this money that’s
supposed to have been made. – Exactly – But they have not pulled it out. Again, this snapshot is not a fact right? So they made that money because there’s a lot of accounts receivable. – Exactly there’s a lot
of account receivable and some of that… – Yeah but they have
not collected the money put in the pocket yet. – Yes. – [Participant] (mumbles)
as the accounts receivables? I’m not very familiar with that. – No that’s absolutely fine. Retained earnings is pretty much in theory the cash that you haven’t pulled out of your company, if you will. It’s your assets, so
everything you have like Dan was saying.
– You own. – That you own. Minus your liabilities,
so the amount that you owe somebody else. That is what you have inside your company. – You could pull out.
– That could go out. Now in this case, I don’t
know if it’s pointed out. Some of those retained
earnings are actually made up of a debt, that he has
taken on or she’s taken on in a company. So it’s not all clean like free cashflow. And I notice Dan to go to
the cashflow statement, that we’re gonna log the answers away, if you took a look at that, the free cashflow is actually going down. It was dropping. It was actually getting pretty bad. – So hold on a second, hold on a second. So you can see that’s a good conversation that you could have, if
this is your company. With the accountant, can you see that? There is no such thing as a
stupid question, you get it? – No, absolutely, ask away. (participant talking off mic) – Exactly exactly. So what does that mean? Even if it’s so obvious,
account receivable, but what does that mean? Okay now I see right? Sure yes one more question. – [Participant] This comes
to a question I have around so many people who’ve
gone down in business, or had a shady accountant, is it because they weren’t monitoring us and watching us (mumbles). – (laughs) Good question. – No it’s a good question. – I’ll let Ryan answer that. – Okay keeping it very simple, very short. Not to touch on his time. A lot of people say they’re accountants, doesn’t mean they’re actually
qualified at what they do. And there’s different
kinds of accountants. So I’m a chartered accountant. I guess there are chartered
professional accountants now. Not it took me seven years to become a CA. We are more than just bookkeepers. When somebody talks
about shady accountant, it depends, it’s about the code of ethics. Depends on how good we are able to talk and ask questions. I sit down and talk with
clients all the time. We are never billing them. We are never particular on the
nickel and dime with clients. It’s about the value that you get. So if you asked your accountant questions, so all of you should have accountants. You have your accountants, should you ask him these hard questions, he should be able to explain it to you. If your accountant cannot
explain your own financial statements to you, you
probably have a problem. – Oh they say that you don’t worry about. (all laughing) Don’t worry about it. – They will. I never say you don’t
need to worry about it. We will talk to you about it later. And you will be surprised
how many accounts I see say that or bookkeepers say that. Because they don’t know. – Yes one more question. – [Participant] I’m detecting
the accountants of Canada and overall or lawyer, people
will blame the accountant because they don’t understand (mumbles). – Yeah.
– Absolutely. – Yes one more question. – Absolutely. – [Participant] Two more, I
have never seen an audited balance sheet, why? Everything has to declare this
according to the standards of Canadian accountants, and this is the (mumbles) says that. How would I trust this and none audited. – What’s the difference
between audited financials and unaudited financials?
– Absolutely so audited financials, the first
one is you pay a lot more for audited financials. The reason why is, it’s a bank
let’s say you have a loan. The bank’s gonna wanna have
assurance that the numbers you have on here is exactly
to point out are real, so the account will go
on and set a audit team and he’ll hire a third party and they will actually go
through and check everything out and make sure these numbers are real. These are unaudited
statements which probably the majority of the people
in the room will have and that’s because the
bank’s not gonna require audited statements. There is no need to have one. That being said, if you
have a good accountant, they will check to ask questions. Is it reasonable that these numbers exist and go from there. But it’s usually quite
expensive to have an audit. – [Participant] This is
quite very humongous claim for financial statement, meaning that it was the very
numbers are pretty obvious. What indicators? Give me three different indicators. Three indicators that will
see if I see ups and downs. Ups and downs and numbers,
something owned up, (mumbles). – Okay that’s a good
question, but hold on to that. Hold on to that, hold on. One round of applause of Ryan. Hold on to that good question. (participants applauding) Because actually we
talk about the topic of three important dials, what are they? (participant talking off mic) What are they, what’s the first one? – [Group] Balance sheet. – Balance sheet, what’s the second one? – [Group] Income statement. – What’s the third one? – Cashflow statement. – Okay pass on to cashflow statement. I want you to see the cashflow statement. See if you get a different story. (crowd talking) And I’ll give you very
quickly, very quickly, I’ll give you three
minutes to go through that. Look at the cashflow statement. Just three minutes. And discuss among the table. What is going on? Some of you would be like ah! Just one piece of paper. So one additional piece of paper. What does that mean? Look at the cashflow statement. (crowd talking) – [Participant] This is a madeup company. – Yeah madeup company but a lot of companies are like that. Don’t be surprised. Don’t be surprised. (crowd talking and murmuring) I like it, like it. (laughs) Now Chris
you’re getting it right? (crowd talking) Give your neighbor a
hi-five and say holy smoke. – [Group] Holy smoke. (slapping noise) – Now, let me answer your question. Now looking at cashflow statement. Do you get a better understanding
exactly what’s going on? Yes or no? – [Group] Yes. – What is this telling you? – [Participant] Bad news. – What is it? Sinking ship, Titanic yes. – [Participant] Bad news. – Bad news yes. Now when you look listen. – [Participant] Sell. – Sell, nobody wants to buy this ship. (participants laughing) – [Participant] Those are in brackets, that’s like negative. – Negative, it means it’s negative. So you look at a balance sheet. And you look at income statement. You thought it was pretty bad. When you look at this,
what does it tell you? It’s really bad. It’s like, you thought it’s pretty. This is really bad. Ryan, how close are they for
like from losing their company? – [Ryan] I’d say maybe
less than six months. – Six months. And the owner goes to work, and talk to all the employees, hey how is it going? Revenue is good. Good job guys. Employees have no idea in a few months they’ll be out of job. Not just out of job, ‘cos
how much money he is owing. This will wipe him out. This will wipe him out. All because he doesn’t
read his financials. I want you to get how serious this is. I wanted to see like, not just, now we are having fun. We are looking at numbers right? But look at the numbers, for some of you, if you don’t look at the numbers, from now on, are you gonna
have cashflow statement? Yes or no? – [Group] Yes.
– Hell yeah. How often you will review it? Once a year? – [Group] Quarterly. – At least quarterly, at least quarterly. Look at what is going on here. Ask questions. Make some changes. What else have you learnt? What have you learnt? What’s going on with the numbers? What’s the most scary
aspect of this thing? (participant talking off mic) Cash at end of year (laughs). (participant talking off mic) Cash end of year. – [Participant] Cash paid to
the supplier and employees. – Yeah cash paid to
suppliers and employees. So is it possible? I don’t know because we
have to find a little bit. But is it maybe possible a good idea maybe to lay off some of
the people that he has? – [Group] Yes. – Right, maybe get rid of
some of the inventories that’s not being, you know,
maybe the dead inventory not selling well. Get some cash coming in right? But if you don’t know the numbers, how do you know those
are the right decisions? The strategies and
tactics, he could’ve just, you know what? I think we need to do
another Facebook campaigning. (all laughing) Is that his problem? – [Participant] No. – No, but he may think
that’s my problem man. I need more sales. I just need to sell more stuff. Dude, your problem is not sales. It’s accounts receivable, it’s inventory. It’s repairs and management. It’s employee overhead is too high. Now the good news is those things can actually be fixed, relatively
in a short period of time. You can do a blowout sale, lay off people. Actually it doesn’t take
as long as you might think. It makes sense, yeah, okay. So far so good? Yes Kevin yes. – [Kevin] (mumbles) it doesn’t matter what industry you are in. This doesn’t (low audio). – Yeah it doesn’t matter
what industry you are in. (participant talking off mic) Yes. – [Participant] It would affect you. – Yeah it would affect you. Again facts don’t cease
to exist just because issues ignore them right? Now yes one more question,
I got to keep going, yes. – [Participant] (low audio) does any one know if there is any site for sector specific businesses
through (low audio). – Okay I think the question
is, let’s say depends on I’m in a manufacturing business. What would be a good industry standard? What is a typical profit margin? Am I within the range or am I not? Is there a site, is there
something there like that? – [Participant] You can
benchmark it with your calender at the end of the year, if
you’ve got a calender right? (participant talking off mic) – Yes, so in a service
based business as a coach. (participant talking off mic) – [Participant] Again it’s
gonna come down to benchmarks. Unfortunately staffs can’t
do those three years behind. I know they are not always the best. You want to have a benchmark and unless you can take a
look at public companies even then, that’s not
gonna be really a great way to benchmark (mumbles). The best way to sit down
at the end of the year, really go over the financial statement and really intuitive businesses deal with all these factors that you have. And don’t get (mumbles). – Yeah and also a lot of
this is highly personal. It’s like what is too much
risk, what’s not enough risk? What kind of profit
margin you’re looking for. How many hours you’re
putting into business? How much money you want to
actually take home right? So some people say you know as a coach, if I make 50,000 dollars
a year I’m quite happy. Some coaches, I want to make
at least a quarter million dollars to take home in my pocket. So what is your goal right? Does that make sense? This so far so good. It’s taking a bit of time, but we have to go through this, yes? – [Group] Yeah. – So I’m gonna go through some strategies. I’m a little bit behind so I’m gonna go a little bit faster? Is that okay? – [Group] Yes. – Because I actually have
a lot of profit maximizer I want to share with you. – [Narrator] 10 times your finances. 10 times your business. 10 times your marketing. 10 times your life. Hit the subscribe button now. (upbeat music)

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