Successful Investors Understand The Business Language

Warren Buffett addressed students at the University of Nebraska at Lincoln in 2003, saying: “Accounting is the language of business, and you have to learn it like a language. You can’t be comfortable in the country if you aren’t comfortable with the language. To be successful at business, you have to understand the underlying financial values of the business.”

To be a successful investor, like Warren Buffett himself, you cannot run away from accounting. But you do not need in depth knowledge how it is produced. What you need to know is that what it does mean to you as an individual investor. Along the way in this blog, you will learn about ratio and its meaning. As for introductory to accounting, you need to understand 3 terminologies:

1. Balance Sheet – It represents the wealth of a company. All assets, liabilities and Equities are reported in this section. Just remember the famous equation: Assets = Liabilities + Equities. Equities is where the investors’ money in. Company can use investors’ money to buy asset for business and operation. Company can owe money to their vendor, borrow money from banks.
   

   Balance Sheet Equation
2. Profit & Loss – This will give a sign how healthy is a company. Sales, Revenue, income, earning versus expenses, dividends will be displayed here.
   

   Sample Statement Of Account – Dutch Lady Milk Industries
3. Cash flow – This represents the condition of a company. This is the blood line for a company. It will capture cash transaction for operation cash flow in and out against cash in hand (cash in banks). A company can survive if had negative flow for a year or two. If the condition continued to be negative, it is a bankrupt signal.
   

   Cash Flow Example
   
   

Imagine yourself is a company. Every month, you will receive a pay check from your employer. What do you do with your money?

• If 10% of your net salary allocate for saving, then, it will be parked under Balance sheet as your asset.
• If 5% of your net salary to pay bills and utilities, this will be under your expense for Profit and Loss.
• If you borrowed money from banks to buy house for RM100k, RM100k will be recorded under your liabilities in balance sheet. Once you fully pay the liabilities, House will be transferred to you asset in balance sheet
• the result of your cash money in and out would be the cash flow.

Kapish?? Feel free to ask.