Which financial statement are you??
The Moving Tribes quiz
Everyone loves a personality testing quiz, don’t they. If you are old enough, that means the ones in Cosmo about what kind of lover you are. Younger, and it’s Buzzfeed on which Avenger you most resemble.
But here at Moving Tribes we are going more cerebral - which financial statement are you?
This train of thought was inspired by some of the discussions that emerged after my most-read post of all, on what it is like going through the painful end of a business.
A lot of the most interesting discussions I’ve had since publishing Besieged have been about the leadership required when a business is in trouble, and how it differs from that needed when a business is growing. Several commenters pointed out that most business leaders go into a distressed business situation with no experience of how to deal with it.
One way I’ve tried to explain that is to point out that leaders who have ‘grown up’ in big businesses or in businesses that are strong, profitable and growing tend to be ‘creatures of the Profit and Loss account’ - they worry about revenue growth, margins and therefore how much profit is generated.
Leaders who have experienced distressed situations and also those entrepreneurs who have run their own businesses tend to be ‘creatures of the Cashflow statement’ - they are worried about paying the bills at the end of the month and understand intimately that it isn’t lack of profit that makes a business go bust but lack of cash.
So let’s extend the analogy further. Which financial statement best describes you?
The P&L
You are fundamentally a commercially oriented leader. You care about market size and market share, about pricing strategy, about competitive analysis, about margins and about product development and buying strategies.
That gives you some huge strengths running a retail or consumer business. Your orientation will be to growth, to finding new revenue streams and to closely managing the daily and weekly process of ‘trading’ the business and winning against your competitors.
But it does also come with some watch-outs. Your orientation to growth and expansion may leave you less focussed on cost control than others, and, as we’ve already seen, you run the risk of not being focussed enough on cashflow - not a problem when times are good, but a big red flag when they are not.
The Balance Sheet
As a Balance Sheet leader you are very focussed on whose money you are spending and whether or not they are getting a decent return on their investment. You know how much debt you have and when it is due, and you keep a close eye on those retained earnings which represent the ultimate scorecard of whether you are delivering value to your shareholders.
Because of your focus on those returns you are likely to be seen as a ‘good bet’ by investors and lenders alike who will value your careful approach. You also have a very keen sense of the way that the ‘working capital’ in your business can flow in and out, and you will give attention to the way that things like payment terms can support your cashflow.
You also have a visceral sense of what your business is ‘made of’ - the assets, goodwill, and other ingredients of your business both now and in the future. When your excitable Profit and Loss friend wants to open another store because “it will be profitable”, it is you who is first to remember that you will be on the hook for the rent for the next 5 or 10 years.
But your weak spot is the commercial. None of the items listed on the Balance Sheet really add up to much for an actual customer buying from you. Without the alchemy that turns assets into products and services, that elusive growth will elude you. You need your P&L friend.
The Cashflow
With a weather eye on the cashflow you are good in a crisis. There is nowhere to hide in the cashflow so whilst the P&L folks are crowing about their success you can see that their profit evaporates when you try to turn it into operating cashflow because of all the capital investment that was needed to generate it.
The Balance Sheet crew might be experts in debt and equity finance, but you can tell them when more of that is needed because the all-important cash balance is getting low. And you can also tell them when there is enough in the piggy bank to pay some of those debts back.
In a crisis, you come to the fore. Your forensic review of “do we have to pay that bill today or can it wait a week”, for example, has saved many a business from tumbling over the edge.
But your weakness is your distance from the real decisions about commercial trading that the P&L crew are so good at and the real decisions about investments that the Balance Sheet gang can make. You have the scoreboard, but being good at writing things on the scoreboard is not the same as being good at playing the game which is being scored.
The Verdict and the Trap
So which of those descriptions best describes you? Whichever of them you identify most with, be careful not to fall into the trap that these quizzes always create for us.
Human nature is such that when faced with a ‘which of these am I’ we love to pigeon-hole ourselves. Just ask someone what their Belbin or Myers-Briggs profile is and sit back for half-an-hour of self analysis.
But all of that misses the point. The universal truth of these kinds of tools is that the point is not to understand “which one I am”. It is to understand the strengths and the weaknesses which that implies, and to do something with that knowledge. Be extra attentive to those topics which you might be in danger of ignoring. Surround yourself with people with complementary skills, not people just like you.
And that is never more true than with these financial statement archetypes. I know several CEOs (particularly those who have grown up through the CFO route) who could do with channelling a bit more “P&L” in their leadership and equally several who have grown up through the commercial channel who would do well to find their inner “Balance Sheet”.
The reality is that running a business today, especially in these choppy economic times, requires all of the skills I’ve described here. You probably won’t ever become someone who can do all of that yourself - but you can certainly build, and appreciate, a team that can.
P.S. - A note for the contrarians
Even as I write this, I can imagine someone out there going “what about the Statement of Changes in Equity”. If that’s you, the reason I’ve ignored it is because I’m old, and date back to the days when there were only three financial statements and I’m not changing now!
And if you are that much of a nerd, I can go one better - as a young management consultant I was always taught that the really interesting stuff in any set of accounts is the detail in the accompanying notes - so let’s all be Notes to the Accounts leaders instead!