MBA with me : Mitul Shahriyar ( Part 6)
Tags: mba
Published: 2023-11-29 14:52:22

"Confidence is contagious . So as lack of confidence" - Vince Lombardi

We are here now:

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/8h56fxu67e8yg58n92x9.png)
Assume that you have a company called Banana Watch

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/vuq1e6905rio7mmv6p7d.png)


**Balance Sheet**
What you own or what things people own from you etc.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/hxouhdq5h1pxpomtkmih.png)


Stuffs you own = assets
People who own stuffs == Equity
Banks own from you == Liabilities

assets = equity + liabilities.


![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/ib5nnflw65l15gbs24sh.png)

So, assets can be broken down further, into current assets which is stuff you can sell in less than year, and long term assets, which is stuff that you can't sell in less than a year.

Meaning it takes you more than a year to sell the stuff. Liabilities can be broken down as follows. Current liabilities is debt that you owe in less than a year like credit cards, and long term liabilities is debt that you owe in greater than one year like your mortgage. And then equity is just the people that own your stuff including you.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/s2yfypphmcdkvem3oxcj.png)

So, assets, current assets equals cash because cash can be converted into itself (laughs) within less than a year, and treasury bills.

So, say you're on treasuries or bonds. That kind of stuff, you can cash in, in less than a year in this example. And then, liabilities, or sorry.Long term assets is stuff like a factory. You see there's a factory there in that picture. That's a very famous album and somebody please, write in the comment section on this course what album cover that is for what band. I'll be really impressed, I'm dating myself here. I'm older than a lot of you, I'm sure, watching this. Okay, liabilities, current liabilities includes credit cards as well as payroll. You have to pay your employees in under a year.
You've got to pay back a credit card in usually a month or less.
Long term liabilities, in this case, let's assume it's banks, okay?

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/8oz5rvyds5qh42rgqu38.png)

I included mini banks and I mentioned this earlier, I'm gonna reinforce it again. You've always gotta make sure that if you deal with banks, and you shouldn't early on, but if you do later onin the lifecycle of your company, you've gotta deal with multiple banks.
Small increments, why?

Because you want those banks to compete. You want them to compete with you to give you the best rate possible. You want to keep them in check. Kind of like you'd never just have one employee responsible for everything because she or he could quit and you're screwed.Or she or he could ask for more money. You wanna have many employees with different tasks if possible. And then equity is just the people, including yourself, that own your assets, own your company. You'll notice that the left side, assets, has to equal liabilities and equities.


![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/37y4n7n4b2y88s1ij9mv.png)


**Income Statement**


![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/y8tl07xac7vtz97t6r2m.png)
Okay, so in our hypothetical corny example that I created,

the Banana Watch Corporation, we've sold $1000 watches. So look at the sales on there, okay? We sold 1,000 watches at $300 each.
That's $300,000 in sales or revenue, same thing. The cost to make those watches we sold, is about $200 each. So $200 times 1,000 watches is $200,000 so sales minus the cost of goods sold or COGS is sales minus the cost of goods sold, is $300,000 minus $200,000 and that's $100,000 and that's called gross profit. Don't ask me why the accounting idiots call it gross profit, it is what it is, okay.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/lf686hfwtexu8qhtetbp.png)


It's just profit that's gross, I don't know why it's gross profit, stupid. So that's $100,000.

And then below that we have all these other expenses and those are called operating expenses or the cost to operate our business. And there sales marketing, S&M, R&D, research and development and also other expenses like, G&A or general expenses. And then we got something called depreciation. And this is messed up, man, but you're allowed to deduct the cost, or the amount you used your machine or car each month. And that's how much it depreciate, like wear and tear. What is the wear and tear on your car? It's so crazy but you can deduct it, right? And it's awesome you can do that and I'll tell you why.
Because the government wants you to invest in your business by buying more machines or more cars. And so you can, the tax benefits is this, if you can deduct that as an expense each month or each quarter, the depreciation expense, even though it's not real, then the tax you pay is lower, right? Okay, so sales minus the cost gets sold is gross profit. Gross profit minus the cost to operate your business, like sales marketing, general expenses, R&D, depreciation, that equals something called operating profit, Or earning before interest and taxes, or EBIT or E-B-I-T, earnings before interest and taxes. And you're saying, why the hell do I need to know about earnings before interest and taxes, Chris?

Why don't you just go to the bottom line? Go to net income, well you can't. Why? The reason is because every country in the world, and every state, and every industry, and every company, has a different way of paying taxes. Everyone pays a little bit different taxes. Just like you pay different tax than somebody else does in your class or in your company. I pay different taxes than my neighbor.

My parents pay different taxes than me. Why do I mention this? Why is this important? Because it's not apples to apples for me to compare the Banana Watch Company to a company in Switzerland for example, where they make inferior watches to our Banana watch, right?

And so, in Switzerland they have a different tax and interest rate structure. And so, investors in our Banana Watch Company wants to understand how our company compares financials-wise, to the inferior Swiss watches. I'm just joking, if anybody Swiss is watching this, then the Banana Watch sucks, okay?

So that's how you do it. You look at operating profit or earnings before taxes. And then what happens is that's called the line, it's accounting nerd speak, don't ask me why. and below that line you have below the line items, right so, below the line items are interest and taxes, which again are different. And the bottom line is that income. That's why an income statement is set up that way, okay.


It is pretty simplistic, right? But it sounds more complicated than that, that's all it is. And so you might ask yourself, okay Mitul that's pretty cool, so I've got $30,000 in net income.

Obviously Mitul, that means I have $30,000 more in my pocket than before.

No it doesn't. It doesn't. Your cash balance is not going to increase by $30,000. Why?

Because you had non-cash items, okay. Remember depreciation that you got a benefit there, right?

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/tnsbairw45ai4gvszvxb.png)

We're not getting $30,000 more in our pocket. We are getting something else. Let's figure out what that something else is.

Okay, so we start with net income at the top of our cash flow statement, right?

We have to deduct that. We want a depreciation on our income statement, so that our earnings are less and we pay less taxes. It's a beautiful thing, right?


And then we're gonna add back the increase in depreciation, right?

Because that cash didn't really leave our pocket, right? We got that benefit from not paying taxes on it. So woo woo, we're up to $32,000 but hold on a second. On our balance sheet, in the current assets section, there's something called accounts receivable and that's gonna hurt our cash balance. Say what?

Well when you sell something, like we sell our Banana Watches, we either sell them for cash or we sell then people use their credit cards, right? Why? Because they just want to pay for it later, right? And so that's called accounts receivable. We have received that cash yet, so we already deduct that okay? So and then what happened was, we actually owed some of our partners money. We bought a lot of supplies for our watches from a company that makes really cool sapphire crystal and sapphire crystal is actually the watch face on our Banana Watch.

And so, we got $20,000 worth of material sapphire crystals  but we haven't paid for it yet. That's called accounts payable, right? And so get got $20,000 benefit, temporarily here. So our net cash flow from operations is $42,000. Okay and so you can see the math there in front of you. And so let me just do a side topic before we moving on here.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/mg37ho0zt2j4hemdoxpp.png)

Okay so let's talk about cash flow from investing. Okay so we bought, we bought a machine. We paid $40,000 for it, right? And so we invested in our company and so that's gonna hurt us we lose $40,000 there, right? But we actually have cash flow from financing of $20,000, because we got a loan for $20,000. So that's more cash in our pocket, right? It's not a good thing but just more cash for now. Right, so if we net all that stuff up, that's a $22,000 increase not a $30,000 increase, okay?

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/tk6bix8g8okycxmkjog9.png)

So our beginning bank balance for cash from our balance sheet before was $60,000 and now our ending cash balances is $82,000.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/ozrgm8bm0itq6rfh2hfm.png)
The x-axis is time, the y-axis is the size of the firm, small firm, medium firm to big firm.

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/19na1gi88fwvlwr9d52o.png)


**Liquidity Ratios**

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/ucwlg3jlfrrdcavmqmb1.png)

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/wpd24bing9nunb4d7j5p.png)

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/xmwi91e3u8k6g836xcto.png)

**Leverage Ratios**


![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/08w7idauou1ruq4s3opd.png)

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/a6u4dnlm1m9o8iqqe7ho.png)
EBITDA means "earnings before interest, taxes, depreciation and amortization."


![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/si028jzy73mcxwryadwg.png)

Okay, other ratios are return on assets.

Whenever you hear the term "return on" something, it basically means net income on the top or profits, same thing, divided by whatever you're returning on. So, net income over assets. Net income over equity.

Suggestions: 
- When you're managing people you always want to praise in public and criticize in private. OK?

- And you always want to approach your boss and ask her him for feedback every three months or so. How am I doing?
- You'll never get a raise unless you ask Get a raise. Remember the Steve Jobs ask video.
So you have to ask to get promoted and how do you do this? Well, you sit down with your boss and you ask her him, What do I need to be considered for promotion to the next level?

And they'll tell you. And you create a list of those items, and once you achieve them, just very politely sit down with them and say, I've achieved all these milestones that we spoke about.
Can I please get a promotion or can I please get a raise?

Note:
Depreciation; 
![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/lcekshwysusixzz0et5j.png)

Current Ratio:

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/nb9h70ewtu7bdnh53wng.png)

Interest coverage ratio:

![Image description](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/lf1n33awzgpjoymnvkjb.png)