Understanding financial statement
Create a Key Indicator Report
A common problem area for many business managers is a lack of understanding of financial statements. As you learned in Chapter 10, the three major financial statements include the income statement, the balance sheet, and the cash flow statement. These three financial statements provide the structure for your planning efforts. If used properly, they act as a budgeting tool, an early warning system, a problem identifier, and a solution generator. You'll learn in this video segment that keeping track of your business's finances should be a priority for you as business owner, but it also should be the job of everyone who works with you and for you. The best way to make that possible is to encourage everyone in your company to read, understand, and act on your monthly financial statements. Jim Schell, business consultant and the author of the book Understanding Your Financial Statements, says that successful business owners share their financial information with partners and employees-giving everyone accountability through what he calls "key indicators" in the company's financial statements.
Once they are made partially responsible for tracking and interpreting the firm's key indicators, a company's employees, advisors, bankers, and advocates are often inspired with ideas on how to save money and focus attention on emerging business trends and directions. Likewise, you, as the business owner and manager, will be better positioned to plan profitable strategies, make better business decisions, and set reasonable objectives for the future.
In the video, Jim Schell says, "When a business owner gets to the point where his favorite day is the day his financials come out-or even better than that, his favorite day of the month is the day he can push the button on his software and out will kick a preliminary income statement-then you know you've arrived at the point where financial statements are meaningful to you. When you know that, you get it-that it's all about numbers." Before answering the questions and working the activities, watch the video case for Chapter 23, entitled Understanding Financial Statements, Part 2.
Questions
1. Based on what you learned in the video, tell where in a company's financial statements you would find each of the 11 key indicators suggested by Jim Schell. What is the purpose of a key indicator report?
2. What are the four questions you learned in Chapter 23 that can be used to evaluate a firm's financial performance? How are these questions best answered? What relationship do you see between the answers to the questions and the key indicators you defined above?
3. What is an internal control system? How do you think a company can implement effective internal controls and also include employees and partners in the management of the company's financials?
Activities
1. Use the Internet or your local library to find financial statements for a real company. Based on the firm's income statement and balance sheet, evaluate the company's financial performance using the approach suggested in Chapter 23.
2. Interpret the company's cash flow statement in terms of the sources and uses of cash. (See Chapter 10 for a refresher on cash flow statements.)
3. List, and briefly describe, five techniques for improving cash flow. Visit the Small Business Help Center at Microsoft.com (http://www.microsoft.com/ smallbusiness/hub.mspx), and search using the key terms "improve cash flow." Compare your results with those of two or three other students.