Disclaimer: I’m not an accountant, not close, but I do know something about small business financial statements and I’m good at seeing inconsistencies.
My Rotary Club is like a lot of small businesses. We need to grow, and it takes money to grow (I tell business buyers, growth sucks cash).
A friend asked for my opinion because he didn’t see how we could afford a marketing program given we’re running at breakeven. The first thing I did, and this is something others in my industry, owners, and buyers should do, was:
Look at the balance sheet.
The balance sheet is usually more important than the income statement for the following reasons and many more.
The P&L is easy to manipulate, the balance sheet less so.
You can see things like if distributions are funded by debt.
Assets can be tracked (do FFE&V go up or down?).
Are AR and AP reasonable?
Is inventory a real number or is it the same year after year?
Bottom line, our Rotary club has the reserves to do a marketing program. And like a business, the hope is the investment will yield results (just like a new hire, new machine, or more marketing).
“Statistics are like a bikini, what they reveal is suggestive, but what they conceal is vital.” Aaron Levenstein