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Love the Numbers

Learn to Read Financial Statements

HERE’S A RIDDLE: What’s one aspect of leadership that some leaders absolutely love, some leaders hate, yet most leaders don’t know how to do properly? The answer is: reading financial statements! Which camp are you in? If you’re in Finance, you love financial statements, don’t you? This is your business; it’s how you keep score, right? Then there are the lines of business leaders who really hate to look at these statements in bad times because they’re full of some pretty ugly news. Yet most leaders don’t even know how to read financial statements, so they simply avoid them. I’m not referring to your department’s budget—that’s not that hard to read (even though it’s frequently outdated or just plain wrong, but that’s between you and the Finance group). No, I’m talking about the big statements, the ones that make it into the annual report. Have you read any good financial statements lately? I didn’t think so. That’s OK, you can admit it—you can confess that you’ve let this skill slide all these years. But here’s a tip: If you want to keep moving your career forward, you need to add this missing link to your leadership chain. You want to really step out of your Comfort Zone? Then tackle this particular development challenge; it will pay big dividends for you in the future.

Four Statements on Your Must-Read List

There are four main financial statements that most companies prepare and report. These include: 1) the balance sheet, 2) the income statement, 3) cash flow statements, and 4) statements of shareholders’ equity. Sometimes these are referred to by different names, but these are the basic statements. Let’s take a look at each one briefly—a sort of “crash course” in reading financial statements.

The balance sheet shows what the company owns (assets) and what it owes (liabilities) at a fixed point in time. Assets include physical property, such as equipment, facilities, and inventory, in addition to things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. Liabilities are amounts of money that a company owes to others and can include all kinds of obligations, such as rent, loans, payroll, money owed for materials or goods, and taxes owed to the government. The statement of shareholder equity is included in the balance sheet and is sometimes called net worth or capital. It’s the money that would be left if a company were to sell all of its assets and pay off all of its liabilities. So, essentially the balance sheet shows the “balance” between assets on the one hand and liabilities and shareholder equity on the other (hopefully, there’s a positive number on that shareholder equity line!).

The income statement shows how much money a company made and spent over a specific period of time (usually a year). This is where you’ll find revenues and expenses—the net of which (the literal “bottom line”) is the company’s net earnings or losses. The income statement tells you how much the company made or lost in the time period. Income statements typically report earnings per share (EPS) data, too. This tells you how much money shareholders would receive if the company were to distribute all of its net earnings for the period (which almost never happens, of course). To calculate EPS, take the total net income and divide it by the number of outstanding shares of the company.

Cash flow statements show the exchange of money between a company and other businesses or institutions over a period of time. This is an important statement (especially lately) because companies need to have enough cash on hand to pay expenses, purchase assets, and so forth. This statement is often a good barometer of a company’s true health.

That’s a start, but of course there is much more to learn. There are dozens of financial terms that you probably hear every day but may not be familiar with (depreciation, amortization, charges, write-offs, etc.). Some of them are mysterious, but others you should know in order to effectively talk finance with the top leaders in the company. Which brings us to your development task: How are you going to get up to speed on reading, understanding, and interpreting financial statements?

One easy way, of course, is to self-teach. Buy a book or do some online research, and try to put the pieces together on your own. If you choose this route, good luck—but don’t read the book right before going to bed, or you’ll be reading one page at a time for years. There’s no doubt you’ll find what you need, but if you haven’t been motivated to self-teach by now, you may want to consider a different approach to this task. A better strategy might be to take a Finance colleague to lunch and beg him or her to tutor you on the basics of reading financial statements (it’s a great way to expand your network inside the company, too). Seriously though, go to the source and ask for some guidance or lessons. Trust me, like everyone else, Finance people love to talk about their world, they have plenty of examples lying around, and they’ll be happy to teach you what you want to know. Finally, see if your corporate learning center or local community college has the classic “finance for non-financial managers” course. If not, look into taking a three-to five-day course from a university or training outfit. Variations of the “non-financial managers” theme have been taught for at least fifty years, and most will meet your needs. Such courses are designed to explore the details of reading financial statements and are usually reasonably priced.

The point is that financial statements aren’t just for Finance leaders. If you want to be taken seriously as a true “business leader,” you need to have at least a working knowledge of balance sheets, income statements, and cash flow. You need to be able to hold you own in a conversation about how the company’s doing financially. You need to be able to listen in to the quarterly earnings call (another good way to learn about finance) and clearly comprehend what the CEO tells the analysts. In short, you need to get your head in the game, and the game of business is money. Learn to love the numbers, and you can cross that particular blind spot off your development list!

Bootstrap Takeaways

Learn to Read Financial Statements

1. You need to know your way around corporate financial statements. Don’t put this off any longer—make learning to read these reports a priority.

2. There are only a few basic statements you need to learn—ask your Finance group to point you in the right direction.

3. Add this knowledge to your skills set—you won’t go any higher without being able to talk intelligently about finance.