financial statementsLet’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:

income statementMeet Isaac. Isaac is your Income Statement

“Hey buddy, check out those sales! Look at all that revenue. Your expenses are pretty low this month, you’re a genius!“
Isaac is “Mr. Positivity”. He likes to show you the good and the bad, with emphasis on the good. Revenues are high, profit looks good, so you’re riding high. What Isaac neglected to inform you of is that 75% of last month’s revenue came from a customer who typically pays about 60 days after receiving their invoice.

balance sheetNext, meet Betsy. Betsy is your Balance Sheet

“Wow, you have some great assets, but your accounts payable are high as well, but you own some great land, but you just wrote off $150k in receivables as uncollected.”
Betsy is the diplomatic friend. She gives you the “big picture“, what you own and what you owe. She lays out both sides equally and let’s you decide.

cash flowLastly, meet Clifford. Clifford is your Cash Flows Statement

“Sure, you made $100k last month, BRA-VO (sarcastic clap)! You do realize that your cash from operations last month was only $15k and according to Betsy, you’re now 60 days late on a $20k accounts payable? How do plan on fixing that, smart guy?”
Clifford is the friend whose advice we never want but know it’s what we need and it will always be the brutal truth. Clifford will pull no punches. He only cares about cold, hard cash!

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.

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