“We want to turn our inventory faster than our people.” – James Sinegal
We all get financial statements. Our bank needs them, and we’re used to referring to them as a guide to our financial decisions.
As important as they are, it’s important to remember that their format isn’t neutral. The structure of those statements, in terms of what is and isn’t prioritized, was built 100 years ago when business owners had different interests.
The next time you look at your statements, here are a few things to consider about how its priorities may differ from your own.
The Roots of Accounting Statements
To appreciate how our statements weigh certain aspects of our business against others, we need to understand where they came from. The processes behind Standard Cost Accounting stretch back to the 1910s/20s, when business looked a lot different than it does now.
A century ago, labour consisted of about 60% manufacturing expenses, with the rest accounting for 30% materials and 10% overhead. The focus was on managing labour because it ate the lion’s share. Overhead was an afterthought, and if mistakes were made from a lack of attention, it didn’t matter much.
Today, overheard is a much larger piece of the fiscal puzzle. Despite that, Standard Cost Accounting relegates it to the last consideration. When it’s deprioritized visually on the statements, we don’t think of it with a deserved sense of urgency.
Inventory: Asset or Frozen Cash?
The pace of change has accelerated exponentially in 100 years. In the 1920s, when you invested in materials or inventory, you could rely on turning them into cash at some point.
Fast forward a century later and it’s more complicated. Manufacturing or purchasing a product now doesn’t mean it’s going to make you any money. Products are going obsolete or out of trend so quickly that it’s a race against time.
What to Remember
Knowing how to read your statements matters because the Deadly Wastes creep up on us as soon as we drop our guard. Here’s what to watch for:
Your financial statements are some of the best tools you have available—if you use them wisely. Look at the numbers with a critical eye, and you may see new opportunities for maximizing your profits.