Analyzing Financial Statements
IT IS INDEED UNFORTUNATE that over the years the accounting profession has concocted rules and regulations so complex as to be virtually unintelligible, even to professional financial analysts. Small-business owners and non-financial managers have been left to fend for themselves while the accounting profession has devised ever more complicated measures of a company’s performance and asset valuation. In large part such complexity is a direct result of defalcations and misrepresentations by financial people employed by publicly listed companies and Wall Street securities firms. In an effort to prevent misrepresentation of the earnings and future potential of listed companies, the Securities and Exchange Commission has foisted increasingly stringent requirements on auditors and the accounting profession. Nevertheless, small-business owners and managers have little choice but to follow the rules of the game.
This chapter should take the mystery out of financial statements, while at the same time giving a few pointers on how to analyze the performance of your company. When it comes to preparing pro forma projections for your business plan, financing plan, or strategic plan, the only way to create credible projections is to relate them to financial statements prepared according to the rules of the accounting profession. And to do that, you need to understand how financial statements are put together. But don’t be put off. We will not get into the wearisome exercise of bookkeeping debits and credits.