“I’m not getting my hopes up” is what I told one of my classmates during our bus ride on our way to class when she told me that our lecture on Finance could be fun. Luckily, I was wrong.
Simon Hulme was our lecturer of the day, and he made us, “creative people” understand a bit (or let me say, a lot more) about finance and its importance.
We started talking about the Profit and Loss Statement. I personally had no idea what that was. The analogy that he gave us was that the P&L statement is like a video that records what happens during a period of time, it could be a month, a quarter or a year. It gives us a clear picture of what is happening in our business. This is a very important tool to understand as an owner because we can make changes if we need to or keep improving if things are going well, if we are making a profit and how much.
We did some fun exercises where we needed to make our own P&L statement based on the data of a company given to us. We had to input the sales made, calculate the gross profit and net profit. It was interesting to put our math hats again after some time.
The next part of the lecture was the balance sheet. This document is like a photograph of the company. It can quickly show the health of the business. Simon told us that by the end of the lecture we would be able to tell how a company is doing in less than two minutes by just looking at the balance sheet. Hmmm… I didn’t think so.
But what exactly is a balance sheet that makes it so important? Making it simple is a statement of what the business owns, what it owes and the shareholders’ equity at a particular point in time, when the picture is taken. It is very useful as it shows what assets does your business have and what liabilities. You can easily see if your assets are greater than your liabilities just by taking a quick look at the balance sheet.
There is a simple formula to know what the shareholders’ equity is: Assets – Liabilities = Shareholders’ Equity (as shown below). This should balance the statement, it should always be balanced, if it doesn’t then there is a problem somewhere.
A balance sheet is also useful to see if how the business has been, if it improved or not, in what aspects, where it might be going wrong and if there is a chance it may collapse in a short amount of time.
We did some more exercises and even though it was a bit more difficult to understand than the P&L statement in the end we were able to look at a balance sheet and in under two minutes understand what was going on with the company.
I look forward to doing some more research on my own to get a good grasps of these two statements as it would be of great importance as I venture into my own business in the near future. I might not become an accountant but if it’s my money and my business I should be able to understand what might be going wrong in the financial side. The financial side of the film is one of its key elements and sometimes it is the weaker part of our skills as producers.
As legendary producer Richard Zanuck once said: “The producer is like the conductor of an orchestra. Maybe he can’t play every instrument, but he knows what every instrument should sound like”.
Topic: Entrepreneurial Finance
References:
Hulme, Simon (2015). The Profit and Loss Made Easy.
Hulme, Simon (2017). The Balance Sheet Made Easy.