5 Chapters to the Financial Statement Story

Looking for an easy, fast yet powerful way to explain your performance using your financial statements? The 5 chapters could be the way to go

People prefer the story to the clinical number this number that. Yes there is a story and  as you will see each chapter is dependent and linked to the other chapter so you have to cover all the chapters to get the full picture.

The 5 chapters to your story integrates the impact of the income statement and the balance sheet in a way that all people can easily understand, engaging discovery that creates opportunity to improve profit cash and returns

For the sake of simplicity we refer to the income statement as the way you make money. The balance sheet is referred to the way you create wealth.

The 5 chapters integrate the way we make money with the way we create wealth establishing how we ultimately drive sustainable value.

Chapter 1 is all about how effectively we grow revenue, usually measured as a growth %. 

Chapter 2 reflects on how we translate growth into superior profitability measured as the amount of profit derived from each revenue $

Chapter 3 now connects the balance sheet with specific focus on working capital, measured by adding receivables plus inventories and or work in progress less payables. The sum of these gives us the total working capital at the measurement date. Working capital is divided into revenue to attain what we call working capital per $ of revenue. This is the amount of working capital required to fund each revenue $.

Note: The connection between chapter 2 and 3, they are both based on the revenue $ allowing powerful insight as to how revenue influences both the income statement and the balance sheet.

 Chapter 4 is all about the King. Correct cash is King which is the OUTCOME of the previous 3 chapters. Thus Cash = have we converted our growth into superior profitability combined with the rigor of sound working capital management (Cash = Chapter 1=2=3)

Chapter 5 is the value creation measure called ROCE or Return on Capital Employed we will do some more work on this measure later. In essence all we are looking for is the ability to improve the profit contribution per $ invested in the business. ROCE = Chapter 1+2+3+4

Now we are in a position to tell our story. We grew our revenue by 23%, resulting in a decline in our profit contribution from 12 cents in the revenue $ to 11 cents. In addition our working capital absorption rate increased from 14 cents to 18 cents per revenue $ producing an operating cash flow of $208.

{If you wish please comment on the operating cash flow, as a manager would the outcome of $208 be acceptable and why. As a hint compare operating profit to operating cash}

This leads us to question the quality of our revenue growth.

Think of the wealth of discovery that can result from this story. Ranging from what created the growth to how profitable was that growth, to how are the new customers behaving in relation to our existing customers and so on. The discovery considerations are endless. 

With good discovery we often gain insight to powerful opportunities that can lead to profit cash and return improvement.

Hopefully the 5 chapters provide a different way to use your financial statements to tell your story. We find this process very effective with our clients in that its takes the accounting out or the financials and makes it more oriented to how we think about our business. Our clients love the story embellishing the case and effect often leading to some very innovative solutions.