The numbers actually DON’T tell the story of your business…
They tell the BACK-story of your business.
When authors create characters for their stories, they spend a lot of time pondering over those characters’ backstories—the who they are and the why they behave the way they do. The how the characters got to the places they currently are.
Just as importantly, the backstories give insights into what actions and behaviors the characters need to take (and that are also believable) to grow the stories in the direction of the authors’ visions. The better the backstories that the authors create, the more believable the characters are to the eyes of the readers (customers), as well as to the all the other characters who collaborate to bring the stories to life.
Our Financials, our Balance Sheets in particular, are the backstories of our businesses.
As the owner of your business, you are the author of its story and, unless you’re going out of business, the story isn’t finished yet. What’s most important here is the better you understand your backstory, the better you can influence the quality of the interactions of the characters—the employees, vendors, clients—necessary to grow your business into realizing your vision.
The narrators of your backstory are your bookkeeper and accountant. Your Income Statement (is). Your Balance Sheet (BS). That’s “managerial-type-accounting. The quality of our understanding of what they are telling us will govern the quality of the assumptions we need to create strategies for how to move our stories forward. For the next month. Next quarter. Next year. The better we understand when to separate—or when to blend— the information from managerial-type accounting, the better we are at “Leadership Accounting.”
Leadership Accounting understands how to use the Balance Sheet to focus on the important numbers for a particular decision or action. It helps to avoid getting lost in the total noise of our financials…to understand trends not just events…to avoid being penny-wise and pound-foolish. Successful leaders know that well-informed decisions are made from understanding how the current state fits into the whole story (BS), and not simply by reacting to the latest chapter (IS).
When we make reactions based on the IS alone, we may unnecessarily cut costs (SAVE ourselves out-of-business). Conversely, we may also be overconfident and add unnecessary/unwise costs (OVER-INVEST ourselves out-of-business). You may take on a wrong customer or product line because you think you need the revenue, NOW! You may add to your bench incorrectly, thinking we need a warm body, NOW! You may take a number of missteps scaling the business or promoting your products because you think you need to conserve cash (UNDER-INVEST ourselves out-of-business).
When we start from and understand the Balance Sheet, we can understand the PRIORITIES and TIME-FRAMES for our decisions. We can understand our business within the CONTEXT-of-TIME, encouraging patience first and reaction second. When we make decisions from the Income Statement first, we react to a CURRENT STATE of making money/losing money. We’re prone to reaction first and patience second. Most importantly, from our Balance Sheet we can BEST understand what actions our cast of characters SHOULD be taking to make our stories BELIEVABLE.
Author your best story by improving the quality of your leadership accounting. Start with improving your understanding of your balance sheet. Then improve your leadership by improving your approach to, and use of, all the financial tools available.
When you can best-command your backstory, you can best-guide your business to the end of the story you’ve envisioned.
That is when you, the author, can tell the story of your business.