Did you ever read the book Men Are from Mars, Women Are from Venus by Dr John Gray? It is a masterful exposition of the differences between men and women, and why they so often talk completely past each other. Like when she says “I’m fine” and means “Things are not fine and mad at you.” If men and women have such difficulty in communicating, it’s not surprising that production-trained farmers battle with financially trained accountants. They come from different planets and speak different languages.
N, P and K, thrips, heartwater and phytophora are gibberish to accountants. Assets, liabilities and marginal costs excite accountants, but often mean very little to non-accountants. Unfortunately the score in business is kept in accountant-speak, and it can be kept in a number of different ways. As business managers, we simply have no choice but to learn the language and concepts to understand the business score. You know the three interrelated scorecards used to measure the performance of a business – the Income Statement, the Balance Sheet and the Cash Flow Statement. But do you understand the purpose of each, and the ways in which they interrelate?
The Income Statement
Better named the income and expenditure statement, as it includes income and expenses, and sometimes called the profit and loss statement, it reflects the performance of a business over time. In fast-moving enterprises, such as broiler production, it should be produced monthly. the slow-moving world of fruit production it’s probably fine to produce it quarterly. crucial to remember that the income statement does not reflect cash. It may well show a nice “profit”, but because, for example, invoices have not actually been paid, you could be in deep trouble cash-wise. Don’t be fooled.
The Balance Sheet
Contrary to the income statement which covers a period of time, a balance sheet is a snapshot of a business at a particular point in time. Like a sequence of snapshots of an ageing face, each provides a solitary image, but it’s the comparison between them that actually tells the story of the changes taking place.
The Cash Flow Statement
Do you remember the saying, “Turnover is vanity, profit is sanity but cash is reality?” The cash flow statement is extracted from both the income statement and the balance sheet. It tells you whether the business is likely to survive or not. It’s by far the most important of the three scorecards and the one to which you should pay most attention. We’ll take a closer look at these scorecards and how they interrelate next time.
Contact Peter Hughes on (013) 745 7303 or e-mail [email protected]. |FW