Financial Statements Are The Core of FPF
“The wealth is not visible in plain sight—it’s visible in the data”
This chapter is critical to understanding financial context. This is where your financial work really starts coming into play. The lists you have made in the Inventory and Goals exercises will now be translated into the three most important financial statements in the world of finance:
Balance Sheet
Income Statement
Cashflow Statement
These statements will serve as the core of everything we do and discuss from here on out.
Everyone, small businesses, banks, governments, multibillion-dollar corporations all use these financial statements as a scaffolding to organize, track, and control financial performance.
Unfortunately, these statements are only known and utilized by finance and business professionals. This is the stuff we should have ALL learned in school. These statements are crucial in maneuvering through your decisions on taxes, applying for loans, starting any kind of business, investing, and simply managing your personal wealth over time. Most individuals do not use these statements to manage their wealth, and this must change if we are to ever reach full power finance.
What gets measured gets managed, make sure you always have an accurate measurement of your finances by updating these statements on a monthly basis.
“Most people live by the Income Statement, which they barely understand, and they simply ignore the Balance Sheet and Cashflow Statement. ”
FPF EXERCISE: FINANCIAL STATEMENTS
Use and/or download these three spreadsheets and fill them out to the best of your ability. Provide as much detail as possible and refer back to the information from the Inventory Chapter in order to fill them out.
THE BALANCE SHEET
The Balance Sheet tells us the story of your Assets vs. your Liabilities, also known as your Equity, which is your Net Worth.
The Balance Sheet is absolutely crucial; it’s probably the most important indicator of your financial state and the only true way to measure wealth. Use this spreadsheet to get a sense of where your equity stands.
Download the template here:
Income Statement = PROFIT & LOSS (P&L)
The Income Statement tells us the story of the money coming in (Gross Income or Revenue) and money going out (Expenses).
If you subtract Expenses from Gross Income, you are left with your Net Income/Burn. Take a look at the different categories on the template. Look familiar? Use the information you already have. (There are already sample numbers in the template; just delete them and fill in the format as it applies to you).
You will find this tool essential as we begin to build your budget and predict your future spending and savings.
Download the template here:
CASH FLOW
The Cash Flow Statement tells us the story of your liquidity. It’s the moderator between the Balance Sheet and P&L.
Companies live and die by the cash flow statement, so you should take it very seriously. Cash flow is critical to your financial wellbeing! Go over your cash flow statement once a month and see how the health of your liquidity is doing, and evaluate how it can be improved to give you financial security.
Download the template here:
- CASH FLOW STATEMENT DOWNLOAD-
More on understating Cashflow here
The following chapters of the FPF Framework will walk you through an in-depth analysis, abstraction, and implementation of each of the 5 core components of these statements: Equity, Assets, Liabilities, Income, Expenses. The chapters are designed to help you fully optimize each component of your personal financial statements, as well as to provide you with an actionable understanding and context of each.