Joe Knight MBA, CFO and Senior Consultant, Business Literacy Institute
It's a common fact, said session presenter Joe Knight, at the start of this lively workshop: Accounting and finance is full of jargon, acronyms and terms that can be hard to understand. This session sought to demystify many of the details surrounding common financial statements supply management professionals come in contact with everyday, such as the income statement, balance sheets and cash flow statements.
"The goal of the income statement is to match revenue with cost, and what's left is profit," said Knight, a CFO and senior consultant at the Business Literacy Institute. Supply management uses the income statement to determine supplier risk. It shows where the spend is, which can help one to figure out how to lower those numbers because revenue growth is the ultimate goal of a successful company.
Knight explained in detail how to look at cost on the income statement, using a hypothetical example to illustrate his points. But when it comes to income statement versus the balance sheet, which is more "important"? Knight says it's the balance sheet because it can show an outside source if a company can be trusted, more or less. "Think of the income statement like it's a high school student's report card; it shows how the student did for the past period of time. But the balance statement is more like a grade point average because it gives a better picture of the overall relationship between what a company owns versus what they owe," said Knight.
The balance sheet also has the ability to track and manage asset turnover and debt to equity. Knight recommended examining a potential supplier's balance sheet to know what the average debt to income ratio is, and compare it to similar companies in that industry to see how they measure up in terms of risk. This is especially important, he said, if you are seeking to build a long-term relationship with that supplier.