The single most important skill for a business owner and investor today is the ability to read financial statements.
In a rapidly changing economy, your business must be able to react, adapt and change. But how do you know which way to jump?
The answer is in your financial statements. There is a story buried with in the columns of numbers. It tells your business past and foretells your business future. The hidden gold is in there and, just as important, you can spot the losers that you need to cut quickly.
The problem is that the story just sits there unless you know how to read it.
But the problem isn’t yours alone. Remember back in 2002, when the crash of a big company, Enron, also brought down the largest CPA firm in the world? That a case of sloppy accounting practices and manipulative executives along with super salesmen who convinced the buying public to ‘Buy! Buy! Buy”. In the frenzy, no one stopped to worry about the fact that they couldn’t understand the financial statements or even really explain what the company did.
When emotion goes up, intelligence thought goes down. And financial statements are all about cold, hard facts. But financial statements really aren’t just cold and hard pieces of information. What they are is truthful statements of where you are and where you’ve been. They are as warm and fuzzy as you want your reaction to them to be to the truthful state of where you are.
But at the same time, a financial statement reports only historical facts. It won’t report assets as true value today if you’ve seen big increases or turned an intangible into a income-producing assets. That’s often the undiscovered gold of a financial statement. But again, you can’t know the story until you can read what they have to say.
So the question really isn’t can you tell the story. The question is whether you are ready to face the truth of your business and investments. The more narrative it takes to explain your current situation, the less likely you’re relying on the real numbers.
This week we’re going to talk about some elements of Understanding Financial Statements. Like Robert Kiyosaki (“Rich Dad Poor Dad” co-author) says “Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.”