Financial Statements are a set of statistics and scores not unlike the statistics and scores that show up after a sports game. For a sports team owner or manager, the statistics, replays, opinions, and ultimately the score, are a vital part of analyzing, tweaking and improving the game. They would never ignore them. It is their way of increasing the win rate. In contrast, business owners and managers, more often than not, it seems, view their financial statements as a necessary evil to satisfy the I.R.S. They either are completely unaware of the power of these reports, or they just choose to discount them. Many business owners are happy to turn the reports over to a bookkeeper or accountant to analyze.
So, what is wrong with that? Well, for starters, when the business owner does not use the financial reports as a tool, profitability is based more on luck than strategy.
Take forecasting the profitability of the business for example. Without knowledge of past performance, how do you come up with reasonable budget numbers? When done properly, there will be at least two components, historical performance and growth projection. However, if you do not clearly understand what is going on in your company, what minor or major changes will you make? Do you have the right mix of staff? Are there product lines that are not profitable? Is your pricing correct? How about your overhead, can that be improved or is it already in line with industry standards? How exactly can you improve your score? Do you know when there is a black hole draining your profits?
Then, there is the control issue. Who is controlling your business? Do you have controls in place? From experience, I can tell you that when the owner does not know what is going on with the finances of the business, there is ample room for corruption. Would you know if someone was stealing from you? Sometimes it is small seemingly insignificant skimming and other times it is more like grand theft. It happens all the time and the business owner is often completely unaware.
The solution is for the business owner to become educated in the financial aspects of the business. This does not mean they have to become an accountant. But, it is critical that they become knowledgeable of the accounting model in place. They need to understand the language. Business finance is no more difficult to understand than most other aspects of running a business. It is probably less difficult than some aspects.
The three most important financial reports are The Balance Sheet, The Income Statement and The Cash Flow Statement. The most important Key Performance Indicators are within these three reports. It is a cake walk!
Are financial statements your friend or foe? Friend, definitely friend! Take the luck out of profitability.