We are going to spend a few weeks talking about an area with which many engineers and technical people are not that familiar – the company’s financial statements. When you are first promoted into management from the technical side of the business, you begin to see monthly financial results. At first it seems quite straightforward when you see the monthly profit or loss statements. But do you really understand what is behind the numbers? Probably not, unless you have had some prior training.

Accountants have a whole series of different reports that tell of the financial health of your company. As part of the senior management team, you should know what these numbers tell you so you can more adequately plan the future of your company. You can’t just leave it to the accountants to tell you what you should do as things change. As a manager, you are held accountable for being competent and honest. The accountant provides management with a scorecard, and auditing ensures that the scorecard is correct. The CEO or president must make decisions for the company based on this report as one of his key inputs.

We have talked about how you make your business plan each year to allocate expenses and revenue projections such that you will show a profit for the year. Each month you will usually see a statement called the “Income Statement” or profit-and-loss report showing how the company has performed compared to the plan.

In addition to the Income Statement, the accountants will prepare a “Balance Sheet” and a “Cash Flow” statement. These are not so easy to read or understand. Many will put these aside once they have seen the results of the Income Statement. However, profit or loss is not as hard fast a number as you may think. The real position of the company can be hidden when observed from only the Income Statement. It’s in the Balance Sheet that the real picture will emerge.

Over the next few weeks we will look at the financial reports of a fictitious company called “Acme Combustion Product” to see how they did during the years 2007 and 2008 as the recession took hold. We will be using a 2008 year-end audit of Acme to analyze the numbers.