How to Read a Financial Report: Wringing Vital Signs Out of the Numbers

Chapter 3. PROFIT ISN'T EVERYTHING

The Threefold Task of Business Managers: Profit, Financial Condition, and Cash Flows

The income statement reports the profit performance of a business. The ability of managers to make sales and to control expenses, and thereby earn profit, is summarized in the income statement. Earning adequate profit is the key for survival and the business manager's most important financial imperative. But the bottom line is not the end of the manager's job, not by a long shot!

To earn profit and stay out of trouble, managers must control the financial condition of the business. This means, among other things, keeping assets and liabilities within proper limits and proportions relative to each other and relative to the sales revenue and expenses of the business. Managers must, in particular, prevent cash shortages that would cause the business to default on its liabilities when they come due, or not be able to meet its payroll on time.

Business managers really have a threefold task: earning enough profit, controlling the company's assets and liabilities, and controlling cash flows. Earning profit by itself does not guarantee survival and good cash flow. A business manager cannot manage profit without also managing the changes in financial condition caused by sales and expenses that produce profit. Making profit may actually cause a temporary drain on cash rather than provide cash.

A business manager should use his or her income statement to evaluate profit performance ...