Turn Your Financial

Statements into a Treasure Map

Mick Holly & Andre Gien

Turn Your Financial

Statements into a Treasure Map

Mick Holly & Andre Gien

To most people, reading financial statements is like trying to decipher ancient hieroglyphics before the discovery of the Rosetta Stone

Yet business performance and individual careers depend on making sound financial decisions

Financial statements are not black and white

They are multi color –there is a huge difference whether you are in the red or you are in the black

Help, I’m color blind!

Do you sit in endless budget meetings where an array of spreadsheets are shown?

The presenter takes you through every line, every calculation.

Yet when the meeting is over you are even more confused!

Of course there is always the toady looking to please the boss using fancy terms they don’t really understand - like EBITDA

Don’t worry.

You can become a Financial Jedi by learning how to Turn Financial Statements into a Story complete with a Treasure Map!

(and yes, you can advance your career too)

CONVERT DRY SPREADSHEET NUMBERS into an EXCITING STORY

The STORY has 3 AMAZING CHARACTERS engaged in eternal conflict

Boil down the statements into 2 BUILDING BLOCKS

Reveal the STORY in 5 EASY CHAPTERS

Create a TREASURE MAP

Embark on a TREASURE HUNT to reveal HIDDEN RICHES

Once Upon A Time…

There were 3 characters:

Vanity, Sanity & King

“Revenue is Vanity, Profit is Sanity and Cash is King”

All you need is observe the behaviors of the 3 characters in your own organizations.

Their choreography mimics the relationships between the Income Statement, Balance Sheet & Statement of Cash flows.

An effervescent chap. Tries to sell his way out of problems.

All about the bottom line. Sees black and white and hates being in the red!

Lovingly counts the cash. Dislikes surprises.

Two things successful businesses must do:

• Make Money

• Generate Cash $$$$

Sadly, most people don’t know the difference between the two.

A business has to make money or “profit.”

But you can’t spend profit—it is an accounting concept.

Profits are used in the balance sheet to create cash and we know we can both spend and invest cash!

Let’s give you two building blocks -- a simple way to look at these two ideas…

The Money Making MachineThe purpose of the Income Statement (aka The Money making Machine) is:

• Convert Vanity’s sales into Gross Profit

• Sanity manages our costs (both Cost of Goods Sold and Operating Expenses)

• To deliver Gross & Operating Profits

• After tax and distributions• We’re left with Retained

Earnings

Retained Earnings is the Equity Fuel we inject into our Wealth Creation Engine

The Wealth Creation Engine(Aka The Balance Sheet)

We have to fund our business. The funds come in only two forms:

• Use Our Own Money (Equity)• Borrow Other Peoples Money

(Interest bearing Debt)

We use these funds to make investments in things like:

• Cash in our bank account• Non cash items like

• Buildings, equipment• Working capital

NB Because the Balance Sheet has to—well, balance, Funding always equals Investments

The Wealth Creation Engine(Aka The Balance Sheet)

Retained Earnings is our Equity Fuel

Our Investments help support Vanity’s sales in the Money Making Machine

The trick to managing wealth creation and cash generation is to operate the engine as efficiently as possible.

We don’t want to consume our precious equity fuel with unnecessary working capital or other bloated non-cash assets.

We want to generate as much cash as we can to keep the King happy and let him make the investments to support Vanity and Sanity

How Our Two Building Blocks Work Together

The investments help Vanity make Sales

Sanity watches price and costs

The Money Making Machine spits out Retained Earnings

Retained Earnings is the fuel for our engine

The King manages the cash

The Story

Told in 5 easy chapters

Once the chapter structure is mastered you can tell the story of any business in just a few minutes.

The story gives you clues to treasure within your business that is hiding as costs or wasted capital

….let’s review what each chapter is about…

Chapter1: Quality of Revenue Growth

Chapter 2: Superior Profitability

Chapter 3: The Hunger Measure

Chapter 4: Cash

Chapter 5: Return on Capital Employed

Chapter 1: Quality of Revenue Growth

A focus on how sales revenues are growing (or shrinking perhaps) over time

Key Insight: Not all growth is good growth!

Example: Vanity wins a big order but discounted price and agreed the customer could pay in 60 days not 30 days

WARNING: This growth upsets Sanity as profit is lower and worries the King as more cash is tied up in working capital

Mostly the domain of Vanity

Key Areas a great Vanity will consider:

• Rate of growth• Do the new sales have the right

margin?• What is the impact of

discounting?• What does this new revenue do

to the King’s cash?

Chapter 2: Superior Profitability

Sanity is the lead character for this element of story

Vanity grew sales 20%! Well done!

Sanity’s key imperative is to manage our cost base well such that:

Profitability (EBIT)% grows faster than our revenue growth %

So in this case—if our EBIT grew more than 20%, then we define that as superior profitability

He is keenly focused on keeping cost growth lower than sales growth

Sanity keeps a weather eye on price and discounts.

Chapter 3: The Hunger Measure

“There is a huge difference between the business that grows and requires lots of capital and the business that grows and doesn’t require capital.”

Warren Buffett

Chapter 3 is a team effort

Describes how hungry our Wealth Creation Engine is for Working Capital

Working Capital is a fancy name for the cash consumed by the engine:

• Accounts Receivable (money our customers owe us)

• Inventory (that we need to service them)

• Accounts Payable (money we owe our suppliers)

So as we grow we want to ensure:• Our new customers pay us as

promptly as our old ones• Vanity & Sanity work with

customers and suppliers to keep our inventories down

• We get friendly terms with our suppliers

Chapter 4: Cash

This chapter is the domain of the King!

A lack of cash or unpredictable cash flows can be the slayer of any business.

When companies are struggling to find cash to pay suppliers or make investments they chase cash in this chapter

NB: Chapter 3 Cash is the OUTCOME of what our 3 characters do in Chapters 1, 2 & 3!

So if lack of cash is an issue you must go and search for the answer in those first three chapters

Cash is the lifeblood of any business. Companies are valued on the quality of their future cash flows

The more cash the King has the greater his flexibility. If he is awash with cash he does not need to borrow money from the bank for example if he wishes to pay out dividends or fund additional investments

Chapter 5: ROCEReturn On Capital Employed

ROCE is a measure of the value creation ability of a business

For example,

ROCE of 20%

simply means for every dollar invested in the business, it generates 20c

Chapter 5 is a product of the first 4 chapters

You don’t need to know the equation. Practically, it is:

the profitability of the Money Making Machine times

the efficiency of the Wealth Creation Engine

X

= ROCE

Creating The Treasure Map

Now the fun can begin. Use a whiteboard or large sheet of paper and draw up boxes for:

• Money Making Machine• Wealth Creation Engine• The Financial Story

Use post it notes to enter key data-you don’t need the endless numbers in the statements—just a few like revenue growth, profitability etc.

We like to add two extra boxes on the bottom:

• Clues• Treasure

Play the roles of Vanity, Sanity & the King and go on your Treasure Hunt!

You will become Financial Wizards and never have to sit in a boring budget meeting again!

We combine The Characters, Story & Building Blocks into a Treasure Map

If you enjoyed this brief on The Treasure Map Methodology please visit us at

Mick HollyChief Treasure Hunter

Andre GienChief Evidence Wizard

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The End