Speedometer vs. fuel gauge

During a recent video interview with Steve Rosvold, Founder of CFO.University, our discussion revolved around the differences between an organization’s income statement (its speedometer - the measure of speed and how fast an organization is moving), and its balance sheet (its fuel gauge - which measures financial liquidity reserves in the tank available to provide additional power to the organization in the future). My key point …

… balance sheets warrant as much attention as income statements.

It is not uncommon for business leaders to focus a disproportionate amount of time and attention on the income statement and insufficient effort to study and understand the quality of their balance sheet. A New York Times article about the challenges Boeing is experiencing, is an apt example of the risk associated with allocating a disproportionate amount of attention to the income statement.

Boeing’s focus on shipping planes as fast as it could (speed) can reasonably be verified by reviewing its revenue growth (income statement). ?A review of Boeing’s 12/31/2023 10-K reflects commercial airplane revenue growth of 30%, from $26 billion in 2022 to nearly $34 billion in 2023.

Speed is important but speed must be managed because uncontrolled speed kills - as common billboard signs declare. Quality functions as an important control factor. True quality enhances speed, profit, and assets. The perception that quality “slows things down” is a dangerous fallacy.

Phil Crosby in his classic book “Quality is Free” makes the point and it is borne out by research into the impact of customer-perceived quality of a company’s products and services compared to its competitors.

Conversely, speeding up throughput and deliveries at the cost of quality eventually catches up and damages both the income statement and balance sheet of the companies attempting quality shortcuts.?

Every dollar you think you are adding to profit by short-circuiting quality has an invisible string attached to it, that will get yanked when the consequences of that short-circuit reveal themselves – and eventually they will.

From the perspective of Finance, a balance sheet is both a reflection of a company’s long-term commitment to “quality” and a window into its future.

The process of remedying Boeing’s quality issues is going to take time. Its balance sheet will be called upon to fund the company during the time it takes to remedy the issues and restore regulator, customer, and shareholder confidence through the tough days, months and perhaps years ahead.

Not Just Boeing

Banks are no exception. Banks dedicate a lot of management resources to qualifying, vetting, and assessing the asset quality of the loans they’ve made and the marketable securities they hold. The quality disciplines of those pre-investment processes eventually reveal themselves in the quality of the asset base and balance sheet.

Additionally, measurements of liquidity and capital (a measure of leverage) demand repetitive periodic and rigorous re-evaluation. The quality of the assets in any firm’s balance sheet requires the same level of attention that the income statement commands. Measurements of liquidity and capital – along with asset quality – reveal the degree to which a business has sufficient fuel in its fuel tank to fund its strategic objectives and growth.

When was the last time you reviewed your balance sheet? What does your balance sheet tell you about your business? Is your business running on a full tank, running on empty, or does it fall somewhere in between? If it falls somewhere in between, are the trends improving, deteriorating, or static?

Your balance sheet tells you the degree to which your business can withstand economic cycles, competitive forces, shifts in demand, and/or quality issues.

And, if you really want to look into the crystal ball of the future, find a way to investigate the actual Quality processes, practices and disciplines within the firm.

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