Welcome to financial literacy 101. This may err on the side of simplicity, however, for those who want to start at the beginning, the beginning is the best place to start!
In simple terms, financial literacy comes down to knowing what my financial position is, or that of my coaching business. In business terms (as well as life), am I making more than I am spending? And then, can I pay my bills when they fall due?
If not, or if you don’t know, try this little adage as a way to begin your financial literacy journey:
This little rhyme summarises the four key elements that are important in understanding the basics of financial literacy, whether it’s your home affairs or the biggest corporation in the world.
Profit & Loss Statement
This is the mechanism for measuring the amount of money coming into your coaching business versus the amount going out. It will show if you are making money or losing money over any given period – generally a month but can be quarterly or annually as well. This statement has three elements – revenue: money you have received, less expenses: money you have spent, the balance being either your profit (the money left over), or loss, if you have spent too much.
Next, we have the Balance Sheet which allows you to see what your financial position is at any point in time. This also has three elements, assets, liabilities, and your “owner’s” equity.
You basically add everything up, not just what we have received and spent via the Profit & Loss Statement, but also who owes you money and who you owe money to.
The Balance Sheet records things of value to you, we call them assets. For example, your PC or mobile phone, online course, books you have created, cash in the bank, and so on.
From this you deduct where you owe money, these are called liabilities and include accounts you need to pay (creditors), tax bills, coaching venue expenses, lease payments etc.
The Balance Sheet is virtually a summary of your business – and it tells you how much money you would have left if you sold all your assets and paid all your liabilities – the balance remaining is what we call your Owners Equity, in the business.
Then we have the Cashflow Statement which tells you how much cash you have on hand for a specific period. Usually a month, but best used when projected into the future. It is different from the profit and loss because it tells you how much cash you have on hand – it shows what you can afford, and if projected, when, and how much cash you will have available.
It also illustrates any changes in your assets, liabilities, and owner’s equity which is valuable for monitoring changes in your coaching business, such things as increased or decreased client numbers [sales movements], cost of communications [zoom, skype and phone], growing unpaid bills or outstanding income. It will answer questions such as, is the business growing, am I losing money, do I have enough to buy something, or do I need to change what I’m doing?
The Cashflow Statement tells you how your business is performing.
And finally, there are Budget Reports which are your guide to understanding what is happening in your business, as opposed to what you expected or planned to happen. These reports are used to watch for areas of over- or under- expenditure, increased or decreased income or sales, and discrepancy from what you expected.
When creating the budget report, you can zoom out to just look at disparities in the major indicators, or zoom in to really see every aspect of how your coaching business is operating. Either way, these disparities are worth looking at. They become a trigger for you to ask questions as to what is causing us to fall short or excel in our expected performance and what you may need to do about it.
The Key to Financial Literacy for Your Coaching Business
The key to financial literacy is knowing what you need to know. And using these four basic reports to give you the information you need to understand how much money you have, how much you owe, how your business is performing, and how to make better business decisions.
If you need a deeper dive into these fundamentals and/or a personal assessment on how to take your business from “just ticking over” to “absolutely flying” – don’t hold back and call me for a chat.