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Chapter Five
Financial Analysis:
Number-Crunching for Profit
Just dropped in to see what condition your condition was in.
PARAPHRASE OF LINE FROM A POPULAR 1960S SONG
Besides return on investment for the products this department
produces, I like to look at companywide things like sales per em-
ployee and return on net assets, said the Agile Manager.
Why bother? said Steve. Don t we have plenty of bean
counters at corporate to worry about stuff like that?
I don t care whether we do or not. It s part of my early warning
system. Tells me about the overall health of the company. If the
sales-per-employee figure is slipping, for example, then I m careful
about requesting funds for a new hire. If the return on assets or
equity is declining, I can expect some kind of belt-tightening pro-
gram. It s not a question of if, but when.
But how do you know what those numbers mean to the senior
managers? How do you know what makes em happy or sad?
I don t know for sure. But I suspect they re doing what I do:
Comparing them to figures for our competitors. Look at this, he
said pulling a sheet from the top drawer of his battered desk. This
45
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46 THE AGILE MANAGER S GUIDE TO UNDERSTANDING FINANCIAL STATEMENTS
is a list of common ratios for our industry. It s compiled by the
Medical Products Manufacturers Association from real numbers. To
be part of the organization, you have to submit financial data.
Hmm, said Steve thoughtfully as he gazed at the page. The
average sales per employee for a company our size is $322,500.
And based on your calculation Steve leaned over to glance at
the Agile Manager s yellow pad we re at around $375,000.
Hey bonus city this year, right?
Sure if it were up to me alone, said the Agile Manager chuck-
ling. But that figure will benefit you in other ways. I just got the
approval to hire another developer, which will take the load off the
rest of us. And we ll be getting a new test bench next month . . .
Most people seem drawn to, indeed, fascinated by, things with
beautiful shapes. It s part of our aesthetic, kinder-gentler-art-
loving side to want to gaze upon visually appealing objects that
speak to and nurture our inner spirit . . . the daring lines of a
Dodge Viper, the breathtaking beauty and simplicity of a tulip
in May, or the financial statements of a company that outwardly
seems so rock-solid that it seems to work out twice a day.
But how can you gently strip away its corporate clothing layer
by layer to reveal whether that company is really in great shape
or just trying to dazzle you with the business version of a face
lift, tummy tuck, Rogaine, or hair transplants?
By reading this chapter, of course!
Liars May Figure, But Figures Don t Lie
Financial analysis is the company version of an annual physi-
cal (cough). Sometimes it s called ratio analysis, although some
of the digital checkups we ll do are ratios and some aren t.
Financial analysis can be fun. Don t adjust your glasses; you
read that right. Why fun? Because statements conceal lots of
important (and sometimes delightful or terrifying) facts just by
the way they re laid out. The information isn t all that obvious.
It s not that someone s trying to pull a fast one (usually not,
anyway). But eyeballing statements to evaluate a company s con-
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Financial Analysis: Number-Crunching for Profit
47
dition will only give you eyestrain. They don t connect certain
pieces of information the way they ll be connected, related, and
explained in plain language here.
You ll notice that we sort of
Best
Tip
eased up to the topic of a com-
pany s financial fitness casually, as
There s no best calculation
if we were approaching the firm
that answers the question,
in a singles bar. We checked it out
How s the business doing?
in general from a distance by
ogling the income statement and
balance sheet. Now it s time to make a serious move.
Take Precautions First
Precautions here means there s no one best calculation you
can do with a company s financial statements that neatly an-
swers the question, How s the business doing? Some of the
calculations we ll do may show that it s in great shape. Others
may show it s in trouble.
And something else: Most of what you ll find out about our
friend Avaricious Industries in this chapter will mean lots more
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