Remember, Financial Numbers Can And Will Play Tricks On You

If I told you that a baseball set of bat and ball together cost $1.10, and then I said the ball cost one dollar less than the bat, how much would you say the ball costs?

If you said 10 cents, you fell for the same trick as many before you, and you are wrong. If you said the ball costs 5 cents, you saw through my monetary trick, and you are correct. The knee-jerk reaction for many is to say the ball is 10 cents, but if that were the case, the total cost for the baseball set would be $1.20. If you stop to really think about it, the problem is simple; you just have to remember it’s “the ball costs a dollar less than the bat”, not “the ball costs a dollar less than the total price”. So if we know that whatever the ball costs is a dollar less than whatever the bat costs, and the total cost of the set that we can’t go over is $1.10, we can simply say, “A dollar is part of the cost of the bat, so take that away and I have $0.10. Luckily, that number splits in two evenly, leaving me with the answer: the ball costs $0.05, because that leaves $1.05 left in the $1.10 total for the cost of the bat, and $0.05 is exactly a dollar less than $1.05.”

This whole example serves to show just how easily financial numbers can play tricks on you. A Part Time CFO understands all the little tricks numbers can play, and helps business owners interpret financial statements correctly. When a business owner sees through the tricks numbers play and truly understands their financial statements, they make better business decisions.

If a company is making money, the P&L will look good, but the cash flow could actually be very poor if the cash cycle (the time between the out lay of cash for inventory and the receipt of cash from customers) is too long. You need to compress this cycle, which may involve negotiating with the trade for better terms or getting faster accounts receivable turnover by first getting more strict company credit policies. Another possible solution would be to extend the payroll from weekly to bi-weekly or possibly even monthly if it’s legal where you are. It could also be that some clients are over buying inventory, and so would need an inventory purchase and receipt plan.

To get an even better grip on all of the tricks that can fool you into thinking your profit accurately represents your cash, watch this 6 and a half minute clip:
Profit Does not Equal Cash Presentation

Understanding the equity section of your balance sheet leads to yet another trick financial numbers can play on you. The difference between assets and liabilities are given values in the equity section. A balance of high equity can deceive you if intangibles (such as patents and trademarks, goodwill, or non-competes) or fixed assets that depreciate in their actual value faster than the accounting depreciation calculation (such as equipment or machinery).

You P&L’s most accurate gross profit margins can still play tricks on you. Often, what should be put in direct cost of the product or service is put in cost of goods sold, and vice versa. Many business owners in the trades (like plumbers, electricians, manufacturers, construction workers, etc.), for instance, don’t put direct labor in cost of goods sold. That omission from cost of goods sold will lead to an inaccurate over statement of gross profit margins, which in turn will lead to bad decisions for business.

Helping business owners understand these tricks and therefore enable them not to get fooled and in trouble is a CFO Service that should be done early on with clients. The sooner business owners recognize these tricks financial numbers play, the sooner they can start making safer, more informed, and all around more productive decisions for their business.

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