Truthful Financial Statements Are A Mirror (March 2009)

Truthful financial statements are a mirror. They are a reflection of what is happening in the business on a day to day basis. They reflect the decisions that management is making and the efficiency (or lack thereof) with which they run their business. Unfortunately, I know of too many operating executives who believe that the financial statements are something that the “accountants do”.

The fact that they feel disconnected between their actions and the financial statements means that something is wrong somewhere. Maybe it’s a lack of communication between operating and financial management. At times, financial results simply aren’t shared and at other times they are not shared with the proper context. Perhaps operating management is insulated by a parent organization from the economic realities of their actions. Or it might be that while short term results appear to be good, the long term consequences of their actions have not yet caught up with them. And then there are times when financial management takes enough actions that they make the sick patient appear relatively healthy (they stretch payables, refinance, provide intercompany loans, or find one-time gains that offset operating losses). Whatever the reason, nothing good can come from this disconnect.

If you’re part of operating management, it’s your responsibility to seek to fully understand the financial results of your organization. If you’re part of financial management, it is your responsibility to do your very best to make sure that operating management understands the financial ramifications of their decisions.

Unfortunately, a lack of understanding of the financial results by operating management is not as rare an occurrence as one might think. I’ve come across a number of companies where this is the case. Often, a finance person gets a call to help when the company is in trouble. When they “dig in”, they find that while the company is financially troubled, the root cause of the problems are sales, operational, quality, service, delivery or some other issue. Although it’s sometimes the case that the finance or accounting staff is incompetent (which means that the debits and credits do not accurately reflect the business operations), this can almost be considered good news as it is the easiest problem to fix.

Notice that I started this newsletter with the word “truthful”. We have all heard of cases where results are not truthful and there is an intentional misstatement of fact. Those misstatements often involve debates around estimates (which are a common part of complex accounting issues). For smaller companies, however, the facts are pretty clear and can be easily interpreted.

Financial statements reflect the operations of the company . . . use them to your advantage.

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®

Ken Homza
Copyright @ 2009 Homza Consulting, Inc.

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