In this post, I continue the last entry in the financial statement intelligence series for entrepreneurs. I also discussed why I’ve gone back to Amazon’s KDP Select program. To get all the details and the latest news on Bitesize Business School’s continued growth and its strategies going forward, check out this episode of the Bitesize Business School Podcast.
Going Back To KDP Select
I’ve been selling my books on Amazon, Barnes & Noble, iTunes, Kobo and Smashwords. Of all those, Kobo was the worst experience, both from a customer service and selling perspective. Their customer service is very slow and the replies you get are vague and look like a bot produced them. I never sold a single book on Kobo.
But you are probably more interested in why I’d give up all of these other platforms for Amazon’s KDP Select. Since my books aren’t high flyers (sell wise), I rolled the them into KDP Select to take advantage of the program’s promotions and borrows. The other platforms weren’t selling enough for me to believe that KDP Select might be a negative action.
In fact, once I completed the transition to KDP Select, I immediately began betting borrows. I’ve had more sells since enrolling. Sells have also been more consistent. I wasn’t expecting such a difference but it is very welcomed.
The biggest news with KDP Select is Kindle Unlimited. It’s very early in the game to make a conclusion about Kindle Unlimited. In this episode of the podcast, I go into detail about Kindle Unlimited and compare it to the existing Prime borrow program.
Financial Intelligence For Entrepreneurs – The Cashflow Statement
Imagine a company that is earning enough money to pay its bill every month. Yet runs out of cash four months later. How is this even possible you might ask?
To understand this scenario, we’re going to employ the services of the cashflow statement. In the end, the cashflow statement reveals all. As they say, cash is king and the cashflow statement is the truth teller.
Going back to our scenario, let’s say this fictitious company is earning $10,000/mo and its total expenses are $6500/mo, leaving the company with a $3500 profit. Money it should be able to bank and accumulate month after month. However, we already know this is not how things turned out. But why?
Depending on who you ask, profit has many interpretations. To some, it means money you can deposit into your bank account. To others, it means money after cost of goods sold or cost of services. There are some that say it is what’s left over after all expenses have been paid. Who is right?
Let’s all get on the same page with our terminology. There are several types of profit that all fall under the umbrella of profit. From the income statement, we first come across gross profit. This is profit after cost of goods sold or cost of services. Then at the bottom of the income statement is net profit. This is gross profit but with expenses, depreciation and EBIT (earnings before interest and taxes) are taken out.
With that out of the way, the question remains, why did this company go broke when it in fact seemed to have plenty of cash. The answer is accrual accounting. Sure, the company had $3500 in “net” profit each month but only on paper. The short answer to the question is that its customers were not paying it the full $3500 every month. This fact comes out in the cashflow statement.
From the income statement, net profit transfers over to the cashflow statement and appears under the section titled ‘Cash From Operating Activities’. Then activities such as accounts receivable/payable, inventory and depreciation are deducted but only if cash has been received and sent out the door. We continue down the cashflow statement with two more sections titled ‘Cash From Financing Activities’ and ‘Cash From Investing Activities’. Again, this is only actually cash received or flowing out of our bank account.
Finally, we end up with cash on hand at the bottom of the cashflow statement. This can be a positive or negative number. It is actual cash in our favor or to our disadvantage. Disadvantage meaning we spent more cash than we brought in.
For our fictitious company, they were withdrawing more cash from their bank account each month than they were depositing. By only taking note of earnings, which looked great, they missed actual cash changing hands. They were booking each invoice sent out as money in the bank, even if customers did not pay those invoices during the same period.
The cashflow statement is extremely powerful. While the income and balance sheets can be manipulated, the cashflow statement is a very difficult place to hide anything.
Furthermore, it is the perfect monitor to check your monthly burn rate. That is, how much money is actually leaving your bank account every month. You’ll also be able to determine if you are sending back into your bank account enough money to cover withdrawals with some left over for a nice cushion.