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How to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John A. Tracy

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3
PROFIT ISN T EVERYTHING
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20 Profi t isn’t everything
The Threefold Task of Business Managers:
Profi t, Financial Condition, and Cash Flows
The income statement reports the profi t performance of a
business. The ability of managers to make sales and to control
expenses, and thereby earn profi t, is summarized in the income
statement. Earning adequate profi t is the key for survival and the
business manager s most important fi nancial imperative. But the bot-
tom line is not the end of the manager s job, not by a long shot!
To earn profi t and stay out of trouble, managers must control
the nancial condition of the business. This means, among other
things, keeping assets and liabilities within proper limits and pro-
portions relative to each other and relative to the sales revenue and
expenses of the business. Managers must, in particular, prevent cash
shortages that would cause the business to default on its liabilities
when they come due, or not be able to meet its payroll on time.
Business managers really have a threefold task: earning
enough profi t, controlling the company s assets and liabilities,
and controlling cash fl ows. Earning profi t by itself does not
guarantee survival and good cash fl ow. A business manager can-
not manage profi t without also managing the changes in fi nan-
cial condition caused by sales and expenses that produce profi t.
Making profi t may actually cause a temporary drain on cash
rather than provide cash.
A business manager should use his or her income statement to
evaluate profi t performance and to ask a raft of profi t - oriented
questions. Did sales revenue meet the goals and objectives for
the period? Why did sales revenue increase compared with last
period? Which expenses increased more or less than they should
have? And there are many more such questions. These profi t
analysis questions are absolutely essential. But the manager can t
stop at the end of these questions.
Beyond profi t analysis, business managers should move on to
nancial condition analysis and cash fl ows analysis. In large busi-
ness corporations, the responsibility for fi nancial condition and
cash fl ows typically is separated from profi t responsibility. The
chief fi nancial offi cer (CFO) of the company is responsible for
nancial condition and cash fl ows. The chief executive and board
of directors oversee the CFO. They need to see the big picture,
which includes all three fi nancial aspects of the business profi t,
nancial condition, and cash fl ow.
In smaller businesses, however, the president or the owner/
manager is directly and totally involved in controlling fi nancial
condition and cash fl ow. There s no one to whom to delegate
these responsibilities.
For all businesses, regardless of size, a fi nancial statement is
prepared for each fi nancial imperative one for profi t perfor-
mance (the income statement), one for fi nancial condition (the
balance sheet), and the statement of cash fl ows.
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