Time goes fast. Years whiz by, quarters, months, and weeks come around too soon.
At the end of December a client got an email from his CPA that said, “It looks like the company lost $100,000 in October.” She deciphered this by looking at the third quarter P&L and an October 23 balance sheet.
My first comment was, “I’ll bet it has something to do with a mid-month statement.” Sure enough, the company’s job system and accounting system only sync at the end of the month so the drop in net income, as per the mid-month balance sheet, was fiction.
I’ve always had a cautionary view of short-term statements of any kind. Watch out for:
- When someone gives me a year-to-date P&L and emphasizes the good or the bad, compared to the most recent full-year, I always ask for similar statements for prior years. There’s a little thing called seasonality.
- I get a kick out of owners who tell me business is good because there’s been a lot of orders “this week.” Usually they say that because the rest of year has been mediocre at best.
- Even sales pipelines have to be compared to other years as many companies order at the end of year (to use up budget) or at the beginning of year (to use their budget before it gets slashed).
- Projections of what a company will do over the next year based on one or two months. As in, “We made $100,000 in June and July so the next year will show $1.2 million in profit and we’ll base the price of the company on $1.2 million.” Of course, June and July are typically spikes not trends.
- To be fair to business sellers I’ll relay the following. The buyer made an offer, it didn’t fly, came back months later with a lower offer because during those months the annual run-rate was lower than the prior months. The seller made the point the company always had 9-10 okay months and always had 2-3 months with large orders, which is why they were growing at 10% or more per year for the last five years.
Warning: don’t make long-term decisions based on short-term information.
“Nobody wants to read about a good-looking happy person. ” Carrie Fisher
