Secret to survival in financial statements

The key issue for businesses today is surviving long enough to make it through the recession. In my days as an executive with a Fortune 400 company and global bankcard, we had entire departments monitoring the economy. Here’s my take.

As far as I can tell, the economy isn’t recovering, moneyed people are frantically looking for safe places to park their wealth and the next batch of business failures will come from long-established, solid and successful companies.

Ten years ago, national debt was less than $6 trillion. Three years ago, it was less than $10 trillion. Now it’s nearly $15 trillion and growing rapidly. All that spending hasn’t stimulated the economy. And now that the federal government has stopped spending like drunken sailors, what will happen?

We still haven’t found the bottom of the housing market. Until housing turns around, a recovery is simply not possible. As housing goes, so goes our economy. Think of all the businesses affected by the housing market: real estate agents, mortgage brokers, lumber yards and title insurers, to name a few. That’s a big chunk of the economy sitting on the sidelines to be talking about recovery.

Bonds and dollars are in trouble. The big bond traders have begun shorting bonds. China, Japan and other holders are liquidating.

The administration refuses to cut budgeted spending.

According to Shadowstats, real inflation is at 10 percent, real unemployment is at 15 percent and the misery index is at 20 percent. Shadowstats uses traditional calculations the government used before it changed them in the early 1990s so people wouldn’t get depressed.

I’m not expecting that we’ll fall off a cliff and start eating our shoes. But at some point, I expect we’ll default on bonds. It nearly happened a couple weeks ago, but they reneged on government pensions for the necessary funds. When default occurs, it will likely be the end of living off other people’s money and the government standard of living will drop $1.5 trillion overnight.

Moneyed people are frantically looking for what might no longer exist —safe places to park wealth. The safe haven of choice is gold, but gold carries unique dangers. Forbes recently predicted the government will return to a gold standard within two years to solve a host of domestic financial woes. If that happens, gold value will be set by law and that will be that. Fortunes will be lost. People will jump out of tall buildings.

But what interests me most is the dizzying heights to which some stock prices are being driven. Consider three companies. LinkedIn just went public. Right now its stocks are trading at 4.5 million times earnings. To put that number in perspective, Christ walked the earth a mere 2,000 years ago, but it will take 4 million years before LinkedIn will return your investment. Salesforce is trading at 435 times earnings. Netflix is trading at 72 times earnings. They’re all overvalued. Apple’s 15 times earnings, Microsoft’s 10 times earnings and Google’s 20 times earnings are more reasonable. When overpriced stocks start falling, you can make a fortune selling them short. But where will you park your money?

What does all this mean for business?

Businesses that were on the edge are already gone. Right now we’re beginning to see solid businesses that went into the recession in good shape depleting their working capital and worrying about their futures.

My first tip is this. To survive the recession, manage analytically using your financial statements. If you can survive, the secret is probably hidden in your financial statements. All you have to do is find it, monitor it and react. But my research tells me few business owners and managers can read their financial statements. The key trends and relationships that could turn their business around are hidden to them.

My second tip is this. Convert key financial data to visually appealing graphics. Every client I’ve tested this on prefers graphics to traditional financial statements. One franchised Realtor is far from analytical, but using graphics he’s adjusted to the trends and is still making significant profits.

Accenture and the other big consulting firms are pushing analytics for a reason. This is no time to argue with success.

Robert Ellis is principal at Ellis CPA, a Grand Junction-based firm that serves closely held businesses throughout the United States. For more information, call 241-5040 or visit www.elliscpa.com.
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Posted by on Jun 1 2011. Filed under Contributors. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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