I recently gave a talk at the 2022 Inside Self-Storage Convention and was asked to write a follow-up article on Financial Literacy. The talk was titled “Reading Your Financial Story, Interpreting Your Self-Storage P & L’s And Other Financial Statements.”

I am amazed at the number of self-storage owners and business owners with little or no financial knowledge, myself included when I got into the business.

Look, I am by far no expert in reading financial statements and knowing my numbers. I learned the hard way that financial knowledge is critical to running any business, even self-storage.

There is much more to being successful in self-storage than buying low and selling high.

Your numbers and ability to tell a story from the numbers are the dials you turn and the levers you pull to grow your business.

I have no accounting or business management background, and many know way more than I do. I will be the first to tell you, listen to them over me. But I had to “dumb down” what accountants and CPAs say to make the financial reports we all look at begin to mean something to me.

The ultimate goal is to have the numbers tell us a story. Then, we can use the story to tweak the business. Or, if we are looking at someone else’s business, know what we can do to improve it.

Warren Buffett said, “The language of business is accounting,” and boy, did I have a lot to learn.

Financial Statements

The Profit & Loss Statement

What do you usually get if you ask your accountant or CPA for financial statements? That’s right, a profit and loss statement (P & L) and a balance sheet.

When I got into the business, I thought I knew what a P & L was, and I realized I had no idea what I was looking at when I saw a balance sheet.

Let’s start with the P & L.

I relate to the different financial statements now as scorecards. The scorecard called a profit and loss statement is just that, a scorecard on “profit.”

Guess what type of scorecard it is not.

Cash.

Money.

In essence, here is the scorecard called a P & L.

Income:
Expenses:
Profit:

 

I thought for years that I understood what was going on. It turns out I didn’t.

Income is easy to understand, kind of. That is the amount of money coming into a company. Right?

Well, kind of. In self-storage, it mostly is. For most of us, it is the amount of money that makes it to the bank and is reported as rent, late fees, or truck rental income.

The expenses are easy to understand. Right? The cost of running a self-storage project or any business.

And if you do a good job, there is a positive number at the bottom. If we do a bad job, a negative number is at the bottom. Correct?

We look at that number on this scorecard, and if it is a positive number, we celebrate. If it is negative, we worry.

Now don’t get me wrong. This is a critical scorecard. An important one. It took me a long time to understand this scorecard is just a theory, not a fact.

It is the theory of “profits” or “net revenue” about your company.

If you look at a monthly P & L, the scorecard for the last month, for example, let’s say you had $50,000 in income and $20,000 in Expenses; in theory, you made $30,000.

Now many will argue with me but think about it. Do you have $30,000 more in the bank?

Go check.

Ninety-nine times out of a hundred, you will not.

Have you ever had a great month on paper (this scorecard) and did not have enough money to pay your bills?

Have you ever had a tax bill and your “profits” show plenty enough to fund it and had not enough money to pay actually pay it?

It turns out the P & L is not even about your profits; it is about the theory of your company’s profits.

You can’t spend “profits.” You can only spend cash.

It turns out that some of the expenses have been paid, and some haven’t. Most of us use “accrual accounting.” In other words, when the bills arrive, they are posted. At that moment, they become expenses.

Some “expenses” are paid with cash, some are paid with an IOU (a credit card, for example), and some are paid next month, or in the case of property taxes, once a year. Yet, those all are “expenses” in that period.

Some of your income may have come to you in cash. Some may have come to you in the form of an IOU (accounts receivable or A/R). For some self-storage owners, IOUs can be income in that period.

You see, that number we rush to look at the bottom line is a theory. The theory about the profits your business makes.

It is an important theory. For example, if this number is negative consistently, this financial scorecard tells us our business model is not working. But this scorecard does not tell you how much cash you are making or losing. Remember, you can’t spend profits.

This scorecard is also like a movie. It shows the theory of profits over a certain time period. If you are looking at a monthly P & L, is a movie about the theory of profits over that month. Yearly or quarterly are the other two time periods this scorecard usually covers.

Just remember, you can’t spend profits.

The real health of your company is how well you turn profits into cash.

And not just any kind of cash.

It turns out there are three types of cash. One is much more important than the other two—more on this in a minute.

But before that, let’s take a look at scorecard number two, the Balance Sheet.

The Balance Sheet

This scorecard is a weird one indeed.

It turns out that every business, including your self-storage business, has “things & stuff.” The balance sheet scorecard is about your facility’s things & stuff.

This scorecard is broken into three basic parts.

Things & Stuff		Owe
		Own

 

So, what are some of the things & stuff a self-storage business would own?

Well, the buildings are things. Right? So is the fencing around the facilities. Computers are things as well.

What else?

It turns out the scorekeepers (CPAs & Accountants) call our money stuff, too. If you have $35,000 in your bank account, that is “stuff” that goes on this scorecard.

The fact that on the first of the month (or on the anniversary date if that is how your facility is set up), your customers will owe you money, that is “stuff” as well. The scorekeepers call that stuff “account receivables.” Once paid, it goes from accounts receivable line on a scorecard to cash in the bank, until you use it to pay bills.

All the retail things we sell in our facilities that I go on about all the time turn out to be “stuff” too. That also shows up on this scorecard.

In accountant-speak, they say there are four major parts of “things and stuff” they measure.

1. Cash
2. Accounts Receivable
3. Inventory
4. PP&E: Property, Plant, and Equipment.

All I know is all of the things and stuff of a self-storage facility will fall into one of their four categories. I don’t care which one they fall under. To me, it is all Things & Stuff.

I finally fingered out that a business will either own or owe on their things and stuff.

So, what would you “owe” in your business?

Well, you owe property taxes, right? You also owe the light bill and the insurance bill. You owe the employment taxes for your manager and their salary when due.

Those are some of the things we owe. The scorekeepers call it “accounts payable” (A/P).

There are also some long-term things we owe as well, right? These longer-term debts are things like the loans for the real estate with the bank. Now the scorekeepers don’t call that A/P for some reason. They call those “owes” Long Term Liabilities.” I guess the difference is if there is interest.

It is called “Long Term Liabilities” if there is interest involved, and if there is no interest, it is A/P.

To me, it doesn’t matter. It is just stuff I owe.

And yes, a business will own things as well. It gets a little weird here.

Mostly the scorekeepers say we own our (1) investment (the money we used to invest in and buy or start the facility), and we own (2) our profits (they call that “earnings”). So, according to them, we own our investment and earnings. It is a good thing it turns out we own our profits. I guess in some countries, and in other times, we wouldn’t necessarily own our profits.

Now, what is cool is that in the above figure, the “things & stuff side” equals the “owe” and “own” Side.

Well, at least I think that is cool.

I guess that’s why they call it a balance sheet. I would much rather call it the Things & Stuff scorecard.

Now here is where it starts to make sense to me. Let’s say your things & stuff equals 10. 

Things & Stuff     10		Owe
		8
		Own
		?

What you owe is 8. What is the amount of own?

That’s right; it is 2.

You are now already way ahead of many business owners.

Now the scorekeepers call “things & stuff” assets. They call “owe” liabilities, and they call “own” equity. But I like mine better; it makes more sense to me. Come up with your own labels that make sense to you.

Now, if the P & L is like a movie on the theory of profits over a time period, it turns out the balance sheet is like a snapshot. It gives the Things & Stuff score in a moment in time. Theoretically, one minute later, it has changed. It is just a score at a given time, like 11:59 PM on 12-31-2021.

Now one more thing for today about the “own” things. Remember, you own your profits, right? Well, it turns out that there are two types of profits you own. There are the profits you own from the first scorecard, the P & L. For now, we will just say it is the profits from a given time period that ends on the day the snapshot was taken for the balance sheet. But there is also another kind of profit or earnings on this part of the scorecard. It is all the earnings you have made since the company’s start you have not paid yourself or your investors.

If you pay yourself or your investors some of the profits, the scorekeepers call that “dividends.” I like to call it the profit I paid out.

If you decide not to pay it out and keep it in the company, it is called “retained earnings.”

Pretty cool, isn’t it?. You now have a basic understanding of a balance sheet. I bet you can now start to look at a balance sheet and get more information about a company than you did before this episode.

Let’s look at something.

Both companies have earnings (or profit) of 4 below, but are these two companies alike?

Company #1

Things & Stuff     10			Owe
			6
			Own
			4
Company 2
	Things & Stuff     1,000		Owe
			996
			Own
			4

 

No, they are not alike. Why?

Are their assets and liabilities alike? Which company would you rather invest in or buy?

Company One can turn a 40% profit on its assets. Company Two can turn less than one-half of one percent of profits on its assets.

But yet, I bet Company Two’s assets are worth more than Company One’s.

Which company is worth more?

Which company is better run?

Can you begin to see things now about a company from their balance sheet you couldn’t before?

You are beginning to translate the accountant’s language into understandable language. Said another way, you turn numbers into words and a story simply by looking at a scorecard.

The Final Financial Scorecard

But other than a snapshot of an instant in time of how much cash is in a bank account, neither the P & L nor the Balance Sheet shows how much cash you have.

And we all know that cash is the lifeblood of your company. Without it, you are dead.

The reality is the scorekeeper is not really that interested in your cash.

You are.

They are more interested in the other two scorecards because they deal with profits because taxes are calculated off profit, not cash.

Now it turns out there is a financial report that deals with cash. I never received it until I started asking for it. It is called a “cash flow statement.”

Since it doesn’t have much to do with calculating profits or taxes, most accountants and CPAs don’t pay a whole lot of attention to it.

I do now, however. It deals with what I think is the most important part of my business, my money or my cash.

Scorecards one and two are theories. This scorecard is a fact.

Profit is a theory. Cash is a fact. You can’t spend profits or pay bills with profits. Try paying your property taxes with retained earnings.

You can only pay with cash.

Scorecard three measures three types of cash in any given time period (remember I said there are three kinds of cash?).

The first type of cash is “operating cash.”

This is cash made in that time period by rent or sales or by having someone pay you what they owed you from another time period that you collect on an IOU (scorekeepers call that A/R or accounts receivable).

Scorecard three, the cash flow statement, also measures the second type of cash, “investment cash.”

Investment cash can be made by selling some of the “things and stuff” on scorecard two, the balance Sheet. Specifically, what the accountants call PP&E (property, plant, and equipment). It can also be spending investment cash by buying PP&E during that time period.

The third type of cash there is “financing cash.”

Financing cash can be made by borrowing from a bank or raising cash from investors, and it can be spent by paying down a loan or paying back investors (called by scorekeepers paying a “dividend”).

The third scorecard looks like this:

Beginning Cash:		_____________________
Operating Cash:		+
		–
Investment Cash:		+
		–
Financing Cash		+
–
Ending Cash:		_____________________

This scorecard is a movie. It is a movie about what happened to your cash over the time period you’re analyzing.

Now given cash is the most important thing for a business owner, don’t you think it would be the most important scorecard for you? I do.

Yes, it is important to know your profit position to design specific tax strategies to reduce your tax liability, but that presupposes you are still in business by knowing your cash position.

Now, remember all cash is not equal. What cash is more important here? Remember?

You got it, operating cash!

If your operating cash is not increasing, your company isn’t going to last.

Sure, there may be sprints during fast growth periods where your profits are rising faster than your cash, but in general, your cash should be growing faster than profits (because scorekeepers have this thing called depreciation that again isn’t real, a theory and it helps keep profits down for taxes).

Now you can put other kinds of cash in besides operating cash to keep things going (and I have in the past used all three in any given year). (1) You can put in your savings. (2) You can sell something to generate cash (that would be selling a PP & E and generating investment cash). (3) Or you can raise more money from investors or a bank (generate cash from financing cash).

But if your operating cash isn’t growing as a general rule, your business will not survive.

Conclusion

I hope this helps in a basic understanding of how to read financial scorecards for your and other people’s companies.

The real and the only goal here is to turn the numbers on these weird statements into a story that helps you make adjustments to your company or look at a company and see where you can improve it.

These, along with the reports from a storage operating system, should give you all you need to make the right adjustments to a business to improve your business and make more money.

In essence, you are buying capital improvements to generate operating cash. That’s all a self-storage facility is and its purpose, financially speaking.

And thank goodness we are in self-storage. No other business has the track record we do.

So good hunting. I am always working on improving my financial literacy, and I hope this helps you.