"Using Common Sense in Life to Understand Financial Statements" - This is the first book about finance that I have read, and it is also the first book that I have finished and understood half of it.
The language of the book is simple and easy to understand, and I personally think it is very suitable for a financial novice like me. There is not much content in this book, and it is divided into four chapters. According to the title, I made a rough mind map, as follows:
1. Whether it is an individual or a company, the income statement = income - expenditure =Money earned on the books (loss or gain)
The amount of money that can be saved every month = income - all expenses.
Therefore, professionals generally do not look at a single profit and loss statement when looking at financial reports. They usually look at financial reports for about five consecutive years, so that they can see whether the company has a long-term and stable profit model.
The motto of the income statement: long-term stable profitability.
2. Balance sheet: In fact, this is a table of assets + liabilities.
Go to the left and deal with how the money is spent - investment strategy capital expenditure
Go to the right and deal with where the money comes from - debt financing strategy
What needs to be noted is: the relative position of short versus short and long versus long in the capital balance sheet. Remember not to compare short with long.
Make the most of your balance sheet: Build on your strengths. "Long-term" in life refers to using long-term capital financing or borrowing to fight long-term capital expenditures.
3. After Qian Bing split into two ways, there are 5 options: ① conservative, ② investment, ③ mergers and acquisitions, ④ repayment, ⑤ dividends.
The principle is: choose ① conservative + other, the reason is: you hope to retain enough cash to "outlast your anger". Keep at least 25% cash on hand. Because you have cash in hand, you can buy most of the assets you want at any time. They hold a large amount of assets, but they may not be able to convert them into enough cash in real time to allow the company to continue to survive.
Extended to the recommended combination of personal asset allocation: life account, leverage account, financial account, retirement or education account (one, two, three, four principles)
1: Life account, usually need to be retained 3-6 months of living funds - life-saving money.
Two: Leverage accounts are mainly used to reduce and evenly share risks. For example, buying insurance and using the power of the bank can help you avoid selling your car or house when you are sick or have an accident and go back to before liberation.
Three: A financial account refers to the money you use to invest. In the words of Teacher Xiaolai, it is "death sentence money." I don’t feel bad at all and it won’t affect my normal life. There are multiple investment projects, and investors can build positions in batches based on their own circumstances, such as US stocks, Hong Kong stocks, blockchain, funds, etc.
Four: Retirement or education account: The guiding principle of this account is: capital preservation, capital preservation, capital preservation. Just be able to outperform inflation. Be careful not to be too greedy.
4. Be sure to read the three statements (profit and loss statement, balance sheet, and cash flow statement) together.
The net profit on the income statement is an estimate and is not 100% certain. Therefore, the balance sheet is a table that can be faked. But the cash flow statement will truly reflect the money coming in and out of the company. Incoming money is positive, and outgoing money is negative, which is clear at a glance.
The cash flow statement is a statement that determines whether it is true or false, and whether it is life or death. This is why Buffett attaches great importance to free cash flow: free cash flow = cash flow from operating activities - what the company needs to continue to survive. basic capital expenditure.
When I just finished reading "Using Common Sense of Life to Understand Financial Statements" for the first time, it was really difficult. I had never been exposed to anything like a lot of numbers. It's really hard to be someone who never cares, so I spent a lot of energy and finally finished reading it. After reading it, it was still a bit vague, and I didn't understand it at all. This process is like getting to know a new product. You must first have a basic understanding of the product. The second time I read it, it was faster than the first time, and I found that when the author talks about a concept, he always talks about it slowly from the little knowledge in life.
? After reading it for the second time and knowing this routine, I first wrote down the concepts that the author wanted to talk about one by one. However, this process was a bit laborious, because these concepts are obviously not independent, but related to each other. , for me as a sales person, I can understand a lot immediately.
Summary 1. When studying, do not complicate complex things, but simplify them, that is, apply the knowledge you have learned to solve unknown problems and understand them step by step; 2. In terms of finance, you cannot For knowledge that is limited to textbooks, you should read more cases and learn to analyze it, and better yet, see how experts interpret it. 3. Learn and apply, and use what you have learned. Analyze more companies, you will naturally become familiar with ten companies rather than a hundred. The more you share with others, the more you talk, the more you think.
After reading this book, I finally understood the things that need to be changed in our company. To achieve stable long-term profits, we need to pay more with more money, and more importantly, we should collect money quickly and pay slowly.
With cash flow - you can save your life!