The ultimate scorecard is your financial statements.
Your company value is a product of not just higher revenues in the income statement, but of a healthier balance sheet and strong cashflow generation. You need to improve all three, which requires an understanding of how they work. We believe the more people understand how the numbers interact, the more engaged and effective they can be.
Josh Waitzin was a child chess prodigy and won his first national Chess Championship at the age of 6. In his book The Art of Learning he describes the similarly bewildering experience of learning to play chess.
“On day one of learning chess you have to internalize how the pieces move. You have to learn their piece values. Each piece is unique having its own strengths and weaknesses. It is overwhelming to consider how and which pieces to move”
The financial statements have many moving parts that are uniquely and almost invisibly interconnected. It is impossible for the novice to appreciate how the income statement flows into the balance sheet or how working capital elements conspire to create or consume cash summarized in the Statement of Cash Flows. Most default to the income statement with a myopic view of revenues and gross profits.
Waitzkin continues “ Instead, let’s take an empty board with just a king and a pawn against a king. They are simple pieces and you learn how they move and play until you are comfortable. Soon enough the movements and values become natural”
Our favorite expression is
Revenue is Vanity, Profit is Sanity & Cash is King
Like the king and the pawn if we understand the pieces of Vanity, Sanity & King we can begin to appreciate how they operate in an intertwined choreography.
“The pieces stop being figurines and start taking on energetic flows. You see how they affect the pieces around them. The network starts to come into focus.
Then I learn the principles of coordinating the pieces and I learn to place my arsenal. Eventually the pieces and the principles merge.
The structure and the bishop are one. Neither has any intrinsic value outside its relation to the other, and they are chunked together in the mind.
This new integration of knowledge has a peculiar effect because the initial maxims of piece value are far from iron clad.
The pieces lose absolute identity.
I learn that rooks and bishops work more effectively together than rooks and knights, but queens and knights tend to have an edge over queens and bishops.
Each piece’s power is purely relational, depending upon such variables as pawn structure and surrounding forces”
Waitzkin’s eloquent description mirrors the process of playing with the financial statement building blocks. You too have an arsenal you can deploy.
For example, debt on the balance sheet loses its absolute identity. It can be good debt or bad debt— that is determined by the cost of that debt and whether you are converting that debt to improved cash with a respectable level of risk.
You begin to appreciate the relationship of Vanity’s revenues on the income statement with their alter ego, accounts receivables on the balance sheet.
Cost of Goods, inventory and underbillings, ebb and flow in their power struggle.
Finally, Waitzkin observes, “Over time each chess principle loses rigidity and you get better at reading the subtle signs of qualitative relativity.
The stronger chess player is often the one less attached to a dogmatic interpretation of the principles.
You look at the board with a whole new set of navigational principles.
The great grandmasters transcend technique and have a deep presence which allows the unconscious mind to flow unhindered”.
Once you are comfortable with the basic financial building blocks you will focus less on the numbers and more on the relationships between the different parts of the statements.
A pattern or story is revealed. The story will bring these relationships into a crystal clear picture and you will be able to see opportunities and meaning that have eluded you in the past.
Yes you may have grown your revenues but maybe the new customers you have won take longer to pay so cashflow dries up.
The wonderful thing about the statements is they are indifferent to departments, silos and levels
Eventually you will become a financial grandmaster, learning how to navigate the improvement terrain in a wholly different way. Above the line improvements stimulate revenue growth and accretive cashflow.
We teach you the secrets of the flooring grandmasters. Using our Running the Business by the Numbers approach we have, on average, delivered the following results for 15 flooring companies:
- Revenue growth of 5-8% that is cash accretive
- $900,000 profit improvement
- $1.3 million in cash
- Reduced debt
- Increased company valuation
The first step to financial grandmaster starts with our chess 101 equivalent, the Business Health Test.
You can watch it here: Business Health Test
If you are interested in learning more please reach out to us