This is a Forbes.com article written by Matt Garrett
At Vanderbilt University, my then girlfriend (now wife) and I began a consulting firm selling art and related services to hotels. Juggling classwork and football practice along with trying to be a good boyfriend meant I had one goal with the business – that it make money to justify the time I was spending on it. Often, though, it appeared that we were working far too hard for what we brought in, though I couldn’t put my finger on why at the time.
It took me until my thirties to figure out why it felt like I was spinning my wheels at times. Since those years selling art services, I’ve been on both sides of the financial statements several times over both as a startup entrepreneur and CFO for hire. In all those years, I’ve learned exactly two things. First, a clear understanding of the financial fundamentals is critical for any business owner to succeed. Second, we as CFOs can make things waaaay too complicated at times for them.
The United States has an alarmingly high failure rate for small businesses. The University of Tennessee reported that 55 percent of new businesses fail within four years and that, in some industries, the failure rate can reach 82 percent. While there are some that can’t be helped, I would submit that a good number of these companies could have thrived if the owners were given the proper financial tools and reports to see how they could make their operations better and more profitable.
It doesn’t matter the line of work. Be they a butcher, a baker or a candlestick maker, the bottom line is what they are taught to review; that at the end of the day, make sure you took in more than you spent. But here’s the problem; the one singular line item in a profit/loss statement can often times be misleading and may in fact cloud inefficient operations, unprofitable product lines, bad pricing models and poor customer relations. It’s partly my profession’s fault. As accountants, we’ve muddied the waters by advocating company executives pay attention to things like EBITDA, or earnings before interest, taxes, depreciation and amortization. While an important figure to a point, it can often be used to hide certain aspects of the business that are hurting an organization’s ability to remain viable and sustain itself.
So it’s in this context that I focus not just on one bottom line, but rather three. I call it the “Triple Bottom Line” and look at three calculations closely – Net Income from Operations, Net Equity and Net Cash from Operations. In doing so, I find that I get a much better understanding as to what aspects of my company are healthy as well as what areas are inhibiting my growth and stability. Calculating them is not hard; they’re just not ones many folks know about.
Well, I hope with future Forbes.com blog posts, I can now do something about that as well as provide tales of my own trials and tribulations as to the mistakes I’ve made in the financial strategy of my own past businesses so that you don’t have to. I look forward to the interaction with you. So be on the lookout for the next article – What Net Income from Operations means.
This article originally ran on Forbes.com on 7/24/13:
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