Perhaps the least understood and utilized weapon in the management arsenal are the business financial statements. While I might have a particular bias because of my chosen profession, I can objectively say failure to use them in your fight for survival will, at a minimum, cause you to lose the battle and worst case, lose the war.
I can’t help but use the war/survival analogy as I know virtually every business owner deals with “conflict”, even “hand to hand combat” daily. Sometimes the skirmishes are with their employees, or perhaps their vendors, even their customers/clients. Either directly or indirectly the effect of the engagements shows up in what is collectively known as the financial statements.
Heavy Artillery
The Balance Sheet and Income Statement of any business is really the equivalent of heavy artillery when engaged in the battles. The business Balance Sheet provides a snapshot as of a particular point in time, e.g., as of September 30, 2009. Essentially it identifies the business resources available to sustain the troops through both existing and future engagements. In layman terms it shows you what you own, what you owe and the difference between the two or your equity. An understanding of its individual components, i.e., assets, liabilities and equity, and the knowledge to monitor the same monthly, creates a huge advantage when engaging “ the enemy”, a/k/a, your competition.
The Income Statement is a reflection of results of operations over a specific period of time, e.g., 1/1/09 – 9/30/09. Results of operations are never measured over a period greater than twelve months. The Income Statement should be a clear reflection, on an interim and annual basis, of whether the war is being won or lost.
“Begin with the End in Mind” – Steven Covey
As Covey suggests in his book “The Seven Habits of Highly Effective People”, we must have a clear understanding of where we are headed if we are to win the war. While understanding the financials of a business, and reviewing them monthly, may not guarantee a victory, neither will a weapon of mass destruction. If, however, your strategic plan is sound, in writing and flexible, these weapons make the likelihood of becoming a casualty of war that much less and perhaps even position you for victory.
This article was written by Gary Field, CPA at Numerico, PC. Click here to view Numerico’s website.
