The other day, I blogged about the desire, in the future, to provide daily P&L statements as part of the daily Flash Report I receive each morning. I received several comments, both on an off the blogsite, numerous emails, and (interestingly enough), more visits than I had ever received to any single blog, although I’m not sure why.
In any event, the communications tended to suggest daily P & L statements were overkill and why (for heaven’s sake), as an entrepreneur, do I find that much necessity to be as granular and introspective as to daily performance.
I thought it was an appropriate question and I want to simply comment on it as a follow-up.
As an entrepreneur, at the end of the day, as odd as this may sound, I have never been particularly focused on net profit or more particularly “making money.” Frankly, I consider that to be one of my personal primary weaknesses because my focus has always been on creating a business enterprise and taking a look at what it looks like after it has been built. I have called that in the past operating in the rear view mirror.
The entrepreneurial process for me has always been more sculptural than it is financial. Hence, it is very easy to become immersed in the art of entrepreneurism when you are not incessantly focused on financial results.
The brilliance of seeing, on a day by day basis, the financial outcome of your endeavors, is that it keeps up front, direct and very personal, whether what you are accomplishing is making money or not. As obvious as I’m sure that is to so many people, it has never been obvious to me, even though I’ve made and lost hundreds of millions over the years.
The first reason why daily P&Ls make sense is because it keeps upfront what the objective of the entire enterprise is – to make money. Absent that granular accountability, it becomes extremely easy to get wrapped up in the artistic process and lose sight of the primary objective.
Secondly, it provides the accountability that fosters survivability. As I continue to ponder the Goldman Sachs testimony and the position that they will no doubt argue in the SEC’s civil action, as well as any other derivative class actions, what is a cogent argument is that they did what they needed to do in order to survive. Had they not hedged when they did, had they not hedged aggressively, and had they not, in their words, turned lemons into lemonade, they might very well have been victims of the Great Recession, not profitable survivors of it. Goldman’s CEO, Lloyd Blankfein, as well as others, were very clear that their first and foremost objective, mandated by their investors, stockholders, clients and regulators, was to survive the seismic shifts in the economy.
Survival is the second reason.
And, finally, third, is the tangible fingerprint that a daily P&L statement provides as to the operational nuances of the business. There is nothing more revealing than a P&L statement along with its folders and subfolders in understanding the cost structure of revenue production in a business. The greatest calamity is when the information you review is dated by 6 weeks, is smoothed out over moving averages, or is otherwise not actionable in real ways.
Far more effective is understanding the numbers on a day by day basis where the opportunity to modify is upfront and in your face. Provided the information is accurate, and provided the information reflects operational contingencies, the opportunity to respond quickly, once decisions have been made, is paramount. It is little wonder that, after reviewing the numbers on a daily basis, the senior management team at Goldman saw the need to shift their strategic position in the housing market in a way which reflected both aggressive hedging in the short term and aggressive shorting in the long term that turned what could have been a financial debacle into an enormous profit in less than two months.
Is it also any wonder that they are making record profits, regardless of whether their stock is being tossed about by the crashing winds of regulatory libido?
So, the takeaways?
Real simple: daily P&L statements for three reasons:
• The profit motive up front and center
• Accountability and survivability
• Visibility and transparency
Good lessons from a painful process!