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help a panicky small-business owner who was about to go belly-
up. The guy™s suppliers had cut off his credit the day they saw his
latest balance sheet. He had no idea why.
The student looked at the balance sheet (something you™ll
learn about in chapter three) and discovered a terrible mistake.
The CPA who prepared the statement for the naive owner had
mistakenly classified the company™s $200,000 mortgage balance”
which had twenty years to run”as a current liability. That meant
it had to be paid within a year. When the suppliers saw this
enormous debt supposedly due within the next twelve months,
they cut off the company™s credit in a New York minute.
When the student confronted the errant CPA with his mis-
take, he harrumphed, muttered, and briskly ushered the lad out
of the office.
The problem was eventually straightened out, and the badly
shaken entrepreneur learned a valuable lesson: Owners need to
know enough about their companies™ statements to read them
critically and understand what they™re reading, because creditors
sure do.
4. Unions. Before contract negotiations come around, unions
13
Financial Statements: Who Needs Them


analyze a company™s financial statements to find evidence of poor
management, mismanagement, good management, and anything
else that might be used as levers in the bargaining process. (Top
executives™ salaries inevitably take a hit, but the size of their
bank accounts cushions the blow.)
BTest
Financial-statement informa-
ip
tion sometimes shows union rep-
resentatives where management Owners: Don™t rely solely on
might find money to pay higher your accountant to paint a
wages and/or better benefits, so picture of your company™s
you can bet your bottom line that financial condition.
a union™s financial wizards really
take the statements apart. And
those guys don™t wear hard hats, carry lunch pails, and play touch
football. They wear suits, carry laptop computers, and play hard-
ball (around the bargaining table).
5. Government. Laws and regulations require companies to
report various financial information to several levels of govern-
ment and associated agencies and bureaus. It™s a necessary evil if
you want to stay in business. Certain taxes are based on the
value of what a company owns, too. And then there™s our friend
the Internal Revenue Service. Enough said?

What™s in It for You
Why should you care about financial statements? Because you
probably enjoy eating and living indoors. But more specifically:
s You can relieve your anxiety about your company going

bankrupt (or bail out early) by reading its statements. You can
also track its financial performance, which has a major impact
on the value of your stock options, 401(k) plans, profit-sharing
programs, and how much expensive art work top management
can buy to decorate the executive suite.
Statements also confirm whether all that downsizing really
made as much difference in the company™s performance as the
boss promised it would.
14 THE AGILE MANAGER™S GUIDE TO UNDERSTANDING FINANCIAL STATEMENTS


You™ll learn to make and defend your proposals in dollars
s

and cents. Ditto requests for more and better equipment to run
your department, division, or team. And those proposals, no matter
what management level you™re on, will all have some bearing on
your company™s financial health.
s You™ll learn to speak a new language. Higher management™s

goals are usually expressed in dollars, and they™re relayed down
the ladder to the rank and file. That™s why accounting has been
called “the language of business.” Agile managers must be rea-
sonably fluent in it.
BT est s You™ll understand financial
ip statements and their own pecu-
liar (but not awfully difficult) jar-
When you learn to speak in
gon. That helps you communi-
the language of numbers,
cate at a higher, more professional
you™ll be speaking the lan-
level.
guage senior managers know
This ability tends to level the
and like best.
playing field when you have to
communicate with full-time
number-crunchers and bean counters who may otherwise try
to dazzle you with footwork. A working knowledge of their
vocabulary insulates you from being snowed by it and may even
help you start a blizzard or two of your own.
s You™ll improve your reputation. Speaking in financial terms

when the occasion calls for it gives you a reputation as a “bot-
tom line” manager, which higher managers will warm to like a
cold dog to a hot stove.
s You™ll be prepared to analyze, interpret, and challenge some

of the numbers that peers and superiors toss around (especially
when they think they can monopolize the meeting).
s You can compare past, present, and projected financial state-

ments from internal profit centers, track important changes from
one financial period to the next, and be ready to supply reasons
for those changes before someone tries to skewer you across a
conference table.
15
Financial Statements: Who Needs Them


You can contrast your company™s operations with outside
s

“benchmark” organizations. That can clarify your relative per-
formance and the reasons behind it. You can also compare your
own area (department, division, or whatever) with other inter-
nal areas, assuming you™re all set up as profit centers that make
and sell some product or service.
s You™ll be able to evaluate the financial fitness of another

company that makes you an attractive job offer”an offer that
may not look so great once you™ve scrutinized the business™s
finances. Who wants to sign on to rearrange deck chairs on the
Titanic?
s Finally, if you understand what financial statements tell you,

you can rule out one more thing that your esteemed colleagues
might blindside you with when you™re jousting for promotions
and raises. People don™t mess with those who understand num-
bers. Agile managers uncomplicate their lives as much as pos-
sible because they learn as much as possible. And that helps them
scale that organization chart faster than a lizard up a palm tree.


The Agile Manager™s Checklist
You need to understand financial statements to:
Analyze the ability of customers to pay you back;
s

Assess the ability of your organization to stay afloat;
s
Defend your proposals to higher management;
s

Gain a reputation as a “bottom line” manager.
s

Use financial statements to compare your operations
with those of competitors or benchmark organizations.
Understand numbers. You™ll climb the ladder faster.
Chapter Two


Understand
The Income Statement




“There was an accountant named Wayne
Whose theories were somewhat insane
With sales in recession
He felt an obsession
To prove that a loss was a gain.”
ANONYMOUS


It was just before 9:00 A.M. As the Agile Manager waited for
Steve to show up, his mind wandered back to a college account-
ing class in which a graduate student did most of the teaching.
During a grueling question-and-answer session, the teacher had
said, “What are you, a bunch of morons? If you can™t understand cost
of goods sold, I can™t wait until you get to inventory valuation.”
A friend of the Agile Manager™s spoke up: “You make it seem
like this stuff is logical. It™s not. When you™re buying components
for a product you™re making, why shouldn™t you be able to deduct
the cost from your revenues right away instead of waiting until the
product gets sold?”

17
18 THE AGILE MANAGER™S GUIDE TO UNDERSTANDING FINANCIAL STATEMENTS


“Because,” sputtered the graduate assistant, “that™s the way it is.
You can™t deduct it until it™s sold.”
“Yeah,” said another student looking at the questioner. “Didn™t
you know that Moses came down off the mountain with the Gener-
ally Accepted Accounting Principles?”
As the class exploded in laughter, the graduate student shook
his head and walked out.
It was then that the Agile Manager realized that financial state-
ments were made up of a lot more than numbers. They were also
made up of tradition, archaic policy, law, and idiosyncrasies. Know-
ing that somehow made understanding them easier.

What™s an income statement? Glad you asked. It™s an account-
ing statement that summarizes a company™s sales, the cost of goods
sold, expenses, and profit or loss (plus a few other items thrown
in for good measure). Although it™s often called a “consolidated
earnings statement,” plain folks usually call it an income statement.

What the Income Statement Covers
The income statement covers a particular period of time. A
company always publishes an annual income statement as part
of its yearly report to stockholders. That report also contains
two other statements, the balance sheet and statement of cash
flows. (We™ll get to those in chapters three and four.)
Companies also produce income statements for shorter peri-
ods, such as a month or a quarter. They send quarterly state-
ments to stockholders to update them about the company™s per-
formance between annual reports.
Quarterly statements are important because they permit man-
agement to stay on top of things. If a company produced an
income statement only once a year, it could get into a financial
jam”and not know until it was too late.

What an Income Statement Shows
When you look at an income statement you™ll see:
s Net sales
19
Understand the Income Statement


The cost of the goods that were sold. This information
s

shows up on income statements for manufacturing, whole-
saling, and retailing firms, because they buy stuff to resell at
a profit. A company that provides only services (consult-
ing, financial planning, or writing computer code, for ex-
ample) wouldn™t have a cost of goods sold item on its in-
come statement.
Gross profit (Net sales “ cost of goods sold = gross profit)
s

Operating expenses (what management spent to run the
s

company during the period that the income statement cov-
ers)
Earnings before income tax
s

Income tax
s

Net income (if you™re lucky or good, or both)
s

Earnings per share of common stock
s

The skeleton of an income statement, then, looks like this:
Net Sales
“ Cost of goods sold
Gross profit
“ Operating expenses
Earnings before income tax
“ Income tax
= Net income or (Net loss)
. . . and earnings per share of common stock.
Net income is the fabled “bottom line” that you hear men-
tioned so often (as in, “What™s the bottom line on your proposal
to replace all our employees with computers, Smedley?”).

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