The reaction of weak management to weak operations is often weak accounting.
- Warren Buffett
In the first week of my arrival in Singapore, I attended a short-term course at NUS titled "Accounting and Finance for Non-Financial Managers." In the coming days, I will share from both the Accounting and Finance perspectives how entrepreneurs can understand their company's financial statements or gain deeper insights into their business by analyzing the financial reports of similar listed companies.
This article is intended for those without an accounting background; please bypass if you are professionally trained. This article is limited to the perspective of small start-up companies like ours, so it has significant limitations.
All wisdom belongs to the two professors from NUS, and the knowledge points in the article are restatements of the content of the professors' courses.
CHNG CHEE KIONG - Associate Professor, Accounting; Vice-Dean (Undergraduate Studies) https://bizfaculty.nus.edu.sg/faculty-details/?profId=12
RUTH TAN - Associate Professor, Deputy Head of Department, Finance https://bizfaculty.nus.edu.sg/faculty-details/?profId=90
Of course, in subsequent shares, I will focus more on the user's perspective, combining monthly experiences of reviewing company financial statements and other similar listed companies' reports to emphasize what is more helpful to us and how we can apply them.
In the first two years of my entrepreneurship, I paid little attention to financial statements: Personally, I have never invested in stocks, so I don't have the habit of studying listed companies' financial reports; at the beginning of entrepreneurship, I focused more on business data itself, and in terms of finance, I only cared about how long the funds in the account could last.
As the entrepreneurial journey progresses, a more macro perspective gradually develops. Every month, a significant amount of time is spent reviewing the financial statements of our company; we also look at the financial reports of similar listed companies. If an internet company goes public, we will ask our IR (Investor Relations) team to analyze the prospectus submitted by the other party during internal meetings, continuously enhancing our understanding of the business in this process.
Since starting to pay attention to financial reports, some financial concepts have been incorporated into daily management: identifying problems and pointing out directions through financial analysis, and verifying the effectiveness of improvements through finance.
Run a company like doing investments.
P.S. Of course, we are still not doing very well and are still in the learning and iteration phase. The understandings added in the article may also be incorrect, and I welcome any criticism or correction.
What does financial statements (financial statements) include?
Among these, for small startups like ours, the three most commonly watched tables in daily company management and industry peer observation are BS (Balance Sheet), P&L (Profit & Loss Statement), and CF (Cash Flow Statement). In the coming days, we will gradually introduce these tables. As for other tables, our American partner uses them to make stock purchase decisions and can derive a lot of information from them. However, for someone who doesn't trade stocks like me, this falls into advanced knowledge, so I pay less attention to it normally; I only check the notes when encountering some outstanding data.
The significance of financial statements in a company
As shown in the figure above, in the middle is our Entity company, where a lot of external or internal data flows into the accounting information system.
The accounting information system includes three types of outputs: financial accounting, tax accounting, and management accounting.
Among these, the output of financial accounting is the recent theme we've been discussing—financial statements. I won't go into detail here, but we will cover this over the next few days.
Tax accounting is not included in this sharing session. However, I would like to add that when reviewing other companies' financial statements, I also pay attention to Earnings Before Interest and Taxes (EBIT). This allows us to disregard income tax rates and financing costs, i.e., it eliminates the influence of capital structure and income tax policies, providing a more accurate comparison of different companies' profitability. Of course, for our company which operates globally, how to conduct tax planning is also an area of expertise, and we still need to hire professional consulting firms for this task. I don't have much say on this topic.
Management accounting is also not included in the sharing, but we do request the finance department to conduct many budgets and cost analyses regularly. A budget should be as close to the actual situation as possible. My previous budgets were overly optimistic, resulting in significant gaps each time. Our Investor Relations (IR) team reminded me that the best budget needs to align with reality while being sufficiently aggressive — one that can be over-achieved with full effort. This is something we've gradually learned over the past few years regarding how to make budgets; cost analysis helps me compare operational costs across different business lines, business groups, and regions horizontally. Of course, the possibility of breaking down these costs depends on the organizational structure and cost allocation.
The meaning of financial statements
A way for companies to present their operational status to the outside world, and one of the most important tests of business success.
Determining valuation, performance evaluation, and debt issuance assessment largely reflects the essence of business and investment.
It provides help for many decisions, such as investment decisions, understanding the macro, industry, and company.
That's all for today's introduction. Finance is a fundamental quality needed for leadership, although I'm not particularly strong in this area either. I still hope to make progress together with everyone through this way.
Tomorrow, we will continue to share about the Balance Sheet - the statement of financial position.