Financials are like a HORSE RACE?? WHAAT?

Photo by LiZardboy on pixabay

Did you see the Derby this weekend?  How exciting to have the horse with the longest odds be the winner! Yes, if you understand the concept of the race, you can understand the similarities to your financials. Financials should not be a big, scary mystery.

In the race, the horses line up in the gate, the bell rings and they’re off! The announcer gives you a moment-by-moment update on how the horses are advancing.  As they pass the different posts, the announcer tells you where the horses are positioned.  Eventually, they cross the finish line and the each horse’s position is listed.  The winnings or losses are absorbed into the owners’ investment.  When another race is run, the horses all line up again in the gate to start the new race.

This is the same as what you see on your financials. 

At the beginning of the year, your Income Statement begins at zero – nothing has happened.  As the year progresses, some items progress faster than others.  The business runs throughout the year until it crosses the finish line.  When the new year begins, your Income Statement begins at zero again.

Photo by Philippe Oursel

Think of the events this way: 

Those distance posts each mark the end of a business period - for instance, a month end. 

Your Balance Sheet (or Statement of Financial Position) is a photograph of your business’ position at each of the posts. 

Photo by Julia Joppien

Your Income Statement (or Statement of Activities) is the movie or play-by-play of how you progressed from the starting gate to that post. 

Photo by Philippe Gras

At the end of the year, the current year income or expense is folded into the accumulated earnings (income and losses from prior years) of the business, and the new year Income Statement begins at zero again. 

[Note: Some software segregates the prior years’ accumulated earnings/losses from the current year’s in the monthly/quarterly Balance Sheets; some show them all on one line.  Regardless, at the end of the year, the software moves all of the current year earnings or losses into the accumulated number permanently, before starting a new year.]

One financial statement isn’t more important than the other financial statement.  Each is simply a different viewpoint of the same scene.  Also, if one is incorrect, then the other is probably incorrect. It’s important to be sure that your balance sheet is correct.  We’ll talk about more about that in the next post.

Photo by Ryan Parker