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The tale of the tape: Financial Statement Literacy for Directors &
Executives
One of the key reasons for this ability to quickly process data is because
executives with these types of backgrounds KNOW EXACTLY WHAT THEY
ARE LOOKING FOR. This, in a nutshell, is the key to literacy as it relates to
financial statements and financial reports. To train a person; be it an
executive or assistant manager, to effectively review and analyze financial
data, they must be able to ascertain what they are looking for and how to
find it in an expeditious nature.
To initiate this process a reviewer must determine why they are being
asked to analyze the financial reports of the organization. Generally
speaking these tasks are ongoing (in that they will be asked to review these
financial documents on an ongoing periodic basis), and they fall into one of
the following categories:
A very simple overview of the financial reports would focus on the three
primary reports that are produced by all organizations:
1. The Profit and Loss Statement – This report is used to detail the
operational activity of the organization, and is a great barometer of
how the company is doing from a sales position, market penetration
perspective, capital responsibility standpoint, a costing standpoint,
and an overall efficiency standpoint. As it relates to the derivatives
of this report the following are some of the most common outputs:
a. Sales
b. Sales Efficiency (Through an analysis of Gross Profit or Net
Sales)
c. Operational Expenses
d. Key Expenditures
e. Tax Position
f. Profitability
2. The Statement of Cash Flows – This report does EXACTLY what it says
it does; analyze how and where cash is flowing in and out of the
organization. While it may not get as much publicity as the Profit and
Loss statement or the Balance Sheet; this report can easily be
referred to as the most important when analyzing the financial
health of an organization. Cash is the life source of any company;
without it YOU ARE DEAD. Regardless of whether your sales are
strong or weak; whether your assets are appreciating or
depreciating, whether the company is profitable or not; without cash
the company is NON-EXISTANT. From a corporate strategy
standpoint or a corporate decision standpoint, this report will guide
how decisions are made and how aggressive the company can be
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While all of these reports show more than what is listed above; most of the
other information can be derived from one’s knowledge of the above
stated outputs. From a literacy standpoint; the primary goal should be to
develop an understanding of these basic outputs; from there (with
consistent exposure) most reviewers should be able to quickly be able to
acquire the necessary information from these reports; and more
importantly they will understand the “why”; which provides a much more
stable analytical base as it relates to financial management.