Matters Column

Analyzing your company financials: Don’t kill the messenger

February 26, 2016
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What is reality? It is whatever you think it is. Your personality, value system, culture and exposure to varying concepts can distort your focus as to what something means.

The next few months are financial statement time. Your first focus will probably be on the tax liability. A lot of you won't spend more than a few minutes analyzing the statement, and most of your attention will be to the bottom line.

The reality is that your finances are unknown to you if you fail to make the effort to read and properly evaluate the reports. 

In 1973, the Indian philosopher Jiddu Krishnamurti wrote "The Awakening of Intelligence." The primary point of his book is that the awakening of intelligence starts when a person admits they don't know. From “I don't know” to knowledge is the awakening of intelligence. Once someone realizes they lack certain knowledge, they choose between attaining that knowledge or remaining uninformed.

Jiddu Krishnamurti comes from a culture that values thought over emotion. Buddhism's best known function is meditation, which is the pursuit of reality without judgment. Accounting is supposed to be the pursuit of reality through financial statements with an objective mindset.

The practice of accounting is based on independence— that is, the person preparing your financial statement should have no vested interest in the results of their work; i.e., they attach no emotion to the outcome. If there is emotion involved, the temptation will be to make assessments based on that emotion. 

The Enron and Arthur Andersen scandal is a classic case of what can go wrong when an accounting firm has a vested interest in the client’s financial aura. Millions were paid to Arthur Andersen for consulting fees, and as long as Enron was in business, the consulting fees continued. Unfortunately, the auditors were influenced by the consulting managers, and one of the icons of American business dissolved in a deluge of lawsuits.

If you are an accountant, you need to focus on accuracy. Some accounting firms also perform a lot of unrelated services. Since objectivity is essential, accounting firms need to be careful about jeopardizing that status.  

Some people don't read their financials because they find them boring or tedious. If that is how you feel, then you don't understand the function of financial statements.

Only a very few people would be able to read the Dead Sea Scrolls in their original form. They were written in a language we don't understand. For all the great value West Michigan places in sacred scripture, still — without knowing the language — you would get nothing out of it.

If you don't understand the language of accounting or the relativity of numbers, you won't get as much value from your accountant. Good accountants help their clients make the best use of financial statements. How are you going to understand your accountant if you don't speak his language?

I love the Eastern concept of removing reactionary response from the observation of events. It seems to me that being in control of your business requires being in control of your thoughts.

Some practitioners of mindful meditation refer to Westerners as having monkey brains — all emotion and very little thought. Those successful in sports, the military and business often are noted for their coolness under fire. Who do you value in a crisis — the person who keeps their cool, or the person who expresses rage or fear?

Accountants are noted for their objectivity. If they are true believers in the concept of independent accountancy, they bring reality to decision making.

When you’re reading your yearend reports, try to read them as if you were a banker, an investor or a stranger with no emotional attachment. What do the numbers tell you without emotional upheaval? You can't think reasonably and be emotionally charged at the same time.

Don't blame the accountant for bad numbers. If the year’s performance is less than you expected and you berate your accountant, it is a classic case of “killing the messenger.”

The first question is the accuracy of the numbers. Obviously, with bad information, you will make bad decisions. Once you are comfortable with the numbers comes the analysis. What happened? Why did it happen? If it’s good, keep it up. If it's bad, what do you need to do to fix it?

Emotion does not benefit that scenario. There is a time and a place for emotion and it isn't while you are analyzing your company’s financials.

The most successful business owners I have known all went through at least one crisis that threatened the viability of their business. In each case during the crisis, they kept their emotions under control and made solid choices of action to save their company. Be brave. Do it.

Paul Hense is the retired president of local accounting firm Hense & Associates and past chairman of the Small Business Association of Michigan.

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