Know Where You’re Going

Know Where You’re Going

A profitable company charts its own course. Its managers can run it in the way they wish to. When a
company stops being profitable, other people begin to poke their noses into the business. Profitability is also
how a manager is most likely to be judged. Is a manager contributing to the company’s profitability every day,
or are they just doing their job and hoping everything will work out?

A famous saying that is attributed to Laurence J. Peter of the peter principle tells us that if we don’t
know where we’re going, we’ll probably wind up somewhere else. If you don’t know how to contribute to
profitability, you’re unlikely to do so effectively.

In fact, too many people in business don’t understand what profit really is, let alone how its calculated.
Nor do they understand that a company’s profit in any given period reflects a whole host of estimates and
assumptions. The art of finance might just as easily be termed the art of making a profit- or, in some cases, the
art of making profits look better than they really are. Some companies play it pretty straight, though there are
always a few that end up pushing the limits-think Enron corp.

The best place to find a company’s profit or loss is on the income statement, because, in essence,
“profit” is no more and no less than what shows up there. By learning to decipher this document, you will be
able to understand and evaluate a company’s profitability. Learning to manage the lines on the income
statement that you can affect will enable you to know how to contribute to that profitability. By learning the
art involved in determining profit, you will be able to increase your financial intelligence. The book Financial
Intelligence: A managers guide to knowing what the numbers really mean does a great job breaking down the
income statement into non-accounting terms that any business manager can understand and learn.
However, in principle, the income statement tries to measure whether the products or services that a
company provides are profitable when everything is added up. It’s the accountant’s best effort to show the
sales the company generated during the given time period, the costs incurred in making those sales (including
the costs of operating the business for that span of time), and the profit, if any, that is left over. Possible bias
aside, this is a critically important endeavor for nearly every manager in a business.

A sales manager needs to know what kind of profits their team is generating so that they can make
decisions about discounts, terms, which customers to pursue, and so on. A marketing manager needs to know
which products are most profitable so that those can be emphasized in any marketing campaigns. A human resource manager should know the profitability of products so that they know where the company’s strategic priorities are likely to lie when he is recruiting new people.

Over time, the income statement and the cash flow statements in a well-run company will track one
another. Profit will be turned into cash. But remember, just because a company is making a profit in any given
time period doesn’t mean it will have the cash to pay its bills. Profit is always an estimate-and you can’t spend

Whatever your position in a company, being able to understand an income statement, and thereby
gain a better understanding on how your company is doing, can help you have a greater impact on the
company’s bottom line, which can help you stand out within your organization in a very positive way.

Source: Financial Intelligence by Karen Berman, Joe Knight and John Case. Joe Knight, and his
partners, Joe Cornwell and Joe Van Den Berge from Setpoint Inc. together have built two
companies with 25-year history of successfully implementing these principles in their thriving
businesses. Setpoint Inc. designs and implements custom rides and attractions for the top
amusement and theme parks in the world, and Setpoint Systems delivers custom automation
and robotics that helps manufacturers large and small improve the way they make and
distribute goods.

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