Creating corporate financial statements is an art, and it’s one that every manager (or anyone who aspires to be one) should be able to converse about intelligently. Authors Karen Berman and Joe Knight have written a book to teach us how: Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean.
Their most important lesson is that financial numbers — whether for revenue or expenditures, profits or losses — are subjective. Accountants who craft financial statements make assumptions that determine how revenue and expenses are accrued and allocated.
Managers who make decisions based on the data that accountants present to them often lack any understanding of these biases, and thus accept whatever they are given at face value. But when you know where the numbers come from, and you understand the factors that have influenced them, you’re able to challenge them when warranted, Berman and Knight argue.
The authors, co-owners of the Business Literacy Institute in Los Angeles, provide a concise tutorial explaining the basics about income statements, balance sheets and cash-flow statements. They illustrate key concepts by showing how you can apply them: how to put together a capital expenditure proposal, for example.
When you have the knowledge and skills to ask questions, you will make more informed decisions about your business. Everyone in a company reaps the benefits of that.
Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean
By Karen Berman and Joe Knight, with John Case
Harvard Business School Press, 2006, US$24.95