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 ﬁ 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
ﬁ 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
ﬁ 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,
ﬁ 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
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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