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Managing by the Numbers
A Commonsense Guide to Understanding and Using Your Company's Financials

by Chuck Kremer and Ron Rizzuto with John Case

2000, Perseus Publishing, Cambridge, Massachusetts, 198 p., softcover, US$16.00
ISBN 0-7382-0256-8

My good friend, Chuck Kremer, is devoted to "financial literacy training." Or, in the broader sense, what we both do is "business literacy training." The goal is improved business performance by way of instilling companies with a culture where everyone thinks as businesspersons.

During hiking and skiing trips, our discussions often turn to training people about value creation in business. For years, Chuck has been teaching non-accountants about accounting—de-mystifying financial statements in ways that most everyone understands. In this book, Managing by the Numbers, Chuck and co-authors Ron Rizzuto (finance professor, U. of Denver) and John Case (distinguished business author) present a very clear guidebook.

The key topics include:

• Financial statements.  Special focus is on the cash flow statement, and the "direct" method of preparing one. Cash is the lifeblood of a business, and the real driver of business value is its ability to generate cash.  This book defers discussion of debits and credits. It's user-friendly.
• The Mobley Matrix™, a way to show relationships between a starting balance sheet, the income statement, a cash flow statement, and an ending balance sheet. This was invented in the 1960s by Lou Mobley of IBM. Chuck is pivotal in promoting these concepts and acquired rights to a Mobley Matrix software package; Chuck also sells an Excel template for preparing the matrix ("Financial Scoreboard" http://www.financialscoreboard.com ).
• Three bottom-line management: Managing by seeing the big picture, using these key measures:
  a. Operating Cash Flow
  b. Net Income
  c. Return on Assets (or Return on Equity)
• "Ratio Magic," the key financial ratios and how they fit together in an extended Du Pont equation.

Excerpt, "Operating Cash Flow"  (p. 46):

"OCF is the lifeblood of a company. After all, a company generates cash in only three ways—from operations, from selling assets, and from  lenders and investors (borrowing money or selling stock). But cash from operations is the most   important of the three. No company can live long on the basis of selling assets. And if you can't generate cash from operations, lenders and investors aren't usually going to be willing to give you their money. So a healthy OCF is one big key to a successful business. You should be thinking about your OCF every day and checking it every month. This is the most important line on the cash-flow statement, more important than ending cash or change in cash or anything else. You can be GE or Microsoft, but if you don't have a healthy ongoing OCF you're on the way down. The companies that really need a lot of cash in the bank are those that don't have a healthy OCF, those that are just starting up and don't expect to have positive OCF for a while, or those that don't have a financing line in place."

This book is for you if feel intimidated by accountants, want to understand the essence of what they do, and don't have a lot of time.

—John Schuyler, June 2000. Revised Nov 2003.

Copyright © 2000 by John R. Schuyler. All rights reserved. Permission to copy with reproduction of this notice.