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More than once in my
business career I have proudly handed over my company’s current
financial statement to a banker or a creditor, all the time praying they
won’t ask any questions.
It’s not that the figures are
inaccurate. They have been put together by Ms. Ferguson, my loyal office
manager, and then checked by our CPA.
No, I believe the numbers are
right on target. The reason I don’t want any questions is because quite
often I am unable to explain what the figures mean.
It can be quite embarrassing.
"Looks like your company is in pretty good shape," says the
banker as he scans the balance sheet. "But how do you explain this
line item for accumulated amortization on your leasehold improvements
dropping so dramatically from your last statement?"
"Hell if I know," I reply.
"What do you say we go have a beer?"
"Your retained earnings are not
what I expected," he continues. "Is this a reflection of your
taking too much of a draw or perhaps an undercapitalization of common
stock?
"How about taking in a baseball
game?" I ask. "Do you like ball games?"
But he is unrelenting. And I know what
he’s thinking. He’s wondering how some schmuck who knows very little
about the basic rules of accounting can actually manage his own business.
So I throw him a tidbit. "Debits
left, credits right."
He gives me a strange look. I do know
something about accounting. Or is it debits right, credits left? Damn, it’s
one or the other. I should have kept quiet.
At least I know I’m not alone. Every
so often I get solicitations in the mail for seminars preying on poor,
lost, unfortunate souls like me.
All of them tell you that in one
fun-filled day you will learn how to understand and analyze financial
statements. They’re tailored to the "Non-Financial Executive,"
or "Non-Financial Professional," meaning they recognize you are
a complete dunce.
I tried one once, many years ago when I
was young and ambitious, thinking there was no limit to my learning. I
remember being put off by the Mr. Roger’s Neighborhood tone used by the
instructor.
"Ok,
class," he would say. "This is a balance sheet. Can we all say
‘balance sheet?’ Good. Mr. Hoppe, you’re not participating.
Remember, if you weren’t such a dunce, you wouldn’t be here.’
I listened and I learned. I recall
walking out after the seminar wondering how I could have complicated
something that was so inherently simple.
I also remember looking at a balance
sheet three days later and having no clue as to the nature and placement
of particular line items.
The information goes in my brain, but
lingers for a limited time only. I’ve pinned the retention period down
to about 12.5 hours or when I go to sleep following the lesson, whichever
is sooner.
There it exists, replaced by a dense
fog that doesn’t lift until everything is explained to me once again and
I have total recall – for about 12.5 hours.
I have come to the conclusion
that, to use the catch-all phrase of the times – I just don’t get
it. And never will.
The fundamental rules of accounting
will always find a way to elude me. I’ve never quite understood the
logic behind making a balance sheet balance. If assets far outweigh
liabilities, why not just go out on a limb and say so?
And why are retained earnings and
capital stock placed on the "liabilities" side of the balance
sheet? I’d modestly like to consider my retained earnings as an asset,
thank you, but the principles of accounting won’t let me.
This most practical of professions
sometimes seems so impractical. It comes so easily to some, so difficult
to others.
I’ll probably never cease trying to
get a solid grasp on the basics of the profession. I recently read another
pamphlet, entitled "Understanding Financial Statements – a Guide
for Non-Financial Professionals." The whole section on balance sheets
was only about 10 pages long.
I read it carefully and
voraciously, understanding every word. The mystery solved itself, line by
line. I finished, hardly believing I had been so thick-headed in the past.
This was easy.
My mistake was reading it right before
I went to bed. I wasted most of my 12.5 hours of comprehension.
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