Let’s face it, for some business owners and top managers, financial statements are the bane of their existence. For businesses of any size, financial statements paint a fiscal picture of the state of your organization. Investors, managers, and the general public can learn everything from how much you’re making, to how much you’re spending, to how much you’ve saved. However, as a company leader or executive, when reviewing your financial statements, especially in small or mid-sized organizations, knowing which financial statement is the most “honest” can mean life or death for the company.
Think of your financial statements like a group of friends. When thinking about those individuals we call “friends”, what words usually come to mind? Loyalty, love, honesty, and acceptance are just a few of the traits we look for when we decide to invite someone into our inner circle. Great friends know us best and will also tell us the truth even when we would rather not hear it. Friends come in different types. Which type of friend will tell you want to hear vs. what you need to hear? Let’s look at 3 major financial statements:
Meet Isaac. Isaac is your Income Statement
Next, meet Betsy. Betsy is your Balance Sheet
Lastly, meet Clifford. Clifford is your Cash Flows Statement
As I once told a client, “receivables don’t pay your bills!” Clifford can be hard on you, but that’s because Clifford knows how important he is to you and wants you to know how much he cares. Without cash, bills don’t get paid, employees don’t get paid, work stops, business closes. It’s just that simple. Since revenue is recognized when it is earned (something your friend Issac missed) it can be misleading on when the high & low periods are for receiving actual funds.
Although the other statements are also important in their own way, cash flow is what keeps a company (especially smaller companies) afloat. When startups are going through rounds of funding, often this cash is used to fund operations and growth until the company is profitable. Cash also gives you the flexibility to expand operations or purchase capital assets when credit rates are less than favorable.
In life we should value all of those who we consider friends. Although they all mean well, not all are equipped to give us the advice we need rather than the great news we want.