Financial issues are the flavour of the day. How effective is the knowledge of finance in the personal sphere? Raj Warrior speculates, in a manner of speaking
Many years ago, I had the dubious pleasure of learning just what it was that a balance sheet did. Oh yes, it wasn’t in isolation by any means. The learning was all about business, so we covered everything, from profit and loss statements to double entry bookkeeping, to depreciation. But it was the whole concept of a balance sheet that really got to me.
Somehow, tradition, the latent accountant gene in all of us or indeed the distaste for disorder has made the balance sheet take on a life of its own. You have two sides that must tally. What you owe and what you are owed sit among your assets and liabilities. The stark reality of the figures tell you and anyone who is interested to be part of your business, what your worth is – with various type of capital thrown in for good measure.
From the multitude of annual reports that land up in the mail should you be but a passing investor in a company, you get the equivalent of a snapshot of the health of a company, sometimes with the convenience of seeing last year’s figures alongside the current one. But somehow, it’s the bits the balance sheet doesn’t tell you that make all the difference.
For instance, how do you value entrepreneurial acumen? Do you just go on inflating goodwill to show a growth? Do you otherwise assign some value to capital? After all, the ability to find a growth industry and deliver products or service that propel the company skywards isn’t something that you can judge until after the fact. A Bill Gates or a Steve Jobs should come with a balance sheet entry that says “future billions” at the very least.
Another bit that really needs to reflect on the balance sheet is a value for marketshare. You see the term bandied around at will. The bigger the company, the more emphasis is laid on building marketshare, usually with aggressive measures to make it happen. Indian shopping portal Flipkart is in the news recently for the lengths they are ready to go to for building marketshare. At last count they seem to be on target to reach a turnover of US$ 10 billion. But it is going to be at the cost of discounts and incentives that is contributing to a loss of $2 billion to achieve that. Yes, the loss shows up on the P&L statement and from there to the balance sheet. But can you just put in a clarifying entry to say that the asset you built up was marketshare?
The issue with a balance sheet is that it offers as much to understand a company as your passport photograph does for an individual. Anyone who has seen my mug shots on the series of passports I’ve held usually comments on my obvious ageing coupled with my misadventures with developing a fashionable facial presentation. My use of large spectacle frames predated the fashion trend by two decades, while my current relatively hairless patch in between my nose and lips should have been my norm twenty years back. What it does is tell the viewer that I’ve been hopelessly out of sync with fashion.
For an industry observer, that’s what a balance sheet does. Or a series of them. Fortunately, as individuals we don’t need our own versions of a balance sheet. We’ve no issue with not knowing how our lives or our finances balance out. You just stick to the real important stuff – like can I afford the new iPhone? Or if I can’t, can I get it on instalments? As long as I spend less than I earn next month – all is well. But is it really? Or is that lack of a focus on a personal financial balance sheet the real reason why mega corporations are profiting from the world’s consumers? Do we really need another new car, new iPhone or television? Could we, instead, shore up our personal balance sheets by prudence and saving, while battling to include the intangibles like a charitable mien, personal happiness and a green footprint? It’ll take some learning, but then that’s a balance sheet I’ll be happy to study.