Photoshopped, flawless celebrities confirm that the camera pretty much lies most of the time.
Many people tell me on regular basis that the numbers don’t lie and you can “trust the figures”. Like the pictures in a magazine financial numbers can be airbrushed. So you need to understand them to know if your business is the stunner it appears to be or if it looks less alluring without the filter.
Doing a business degree and following it up with an MBA you get to read a lot of books. Some amazing – others I had to force myself to finish.
Of the hundreds I have read on finance, the best by far was “Accounting for Growth” by The City legend Terry Smith. As an analyst and investor, Smith pored over the accounts of listed companies. He identified which companies were genuinely profitable and who were using crafty accounting techniques to ramp their profits and therefore the share price.
On the basis that most of our blog readers are unlikely to be Chief Execs or Finance Directors of PLCs looking to manipulate their profits and share prices then why is this relevant? The issue is that even a badly trained accountant can manipulate your numbers – without breaking the law. On that basis do you know what your numbers are really telling you?
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When clients first join our Mastermind groups the most common weakness is lack of understanding of the financial scorecards. The majority only produce annual statutory tax accounts because they are legally obliged to. Of those who do produce more regular “management accounts,” they are often actually cash accounts when what is required are accrual accounts. Proper management accounts based on accruals are the only way to see how your business is performing. Without them, you are driving along blindfolded and at some stage you will crash .
There are three scorecards you need to have, on a monthly basis, and understand if you are going to properly manage your business:
- A Statement of profit and loss (using the accrual method)
- A balance sheet
- A statement of cash flow.
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Warren Buffet said, “If you can’t read the scoreboard, then you don’t know the score, and if you don’t know the score, then you can’t tell the winners from the losers”. This is why you need to know where your business is based on numbers.
The process starts from your strategic plan and the budget that you build to deliver this plan. Again, clients, when we start working with them, often have neither of these things. With no plan and no budget, how do they know if they are travelling in the right direct and if you are travelling there quickly enough to achieve your goals?
I will leave you with a quote from my favourite book of all time. It was written by a great academic called Charles Dodson who was a genuine genius who had a range of expertise including mathematics, logic and philosophy. So he is the perfect person to call on when looking at numbers, strategy and budgets. However, this book is not a set text on any of the business programmes I have studied.
“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to.”
“I don’t much care where.”
“Then it doesn’t much matter which way you go.”
“ …So long as I get somewhere.”
“Oh, you’re sure to do that, if only you walk long enough.”
That was the conversation between Alice and the Cheshire Cat in Alice in Wonderland and the genius who was Charles Dodson used the pen name, Lewis Caroll.