Is GAAP Enough?

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I applied for a job once and was asked whether GAAP financials were all you need to tell the financial health of an enterprise. It was a trick question, of course. It had to be. So I acted incredulous.

“Not at all. They’re just a start.” I could have added that they’re probably the least useful numbers for an operations manager.

I elaborated:

• Budgets are important, too, naturally. And especially budget variances.

• Continually refreshed revenue forecasts are critical—particularly for the near future and mid-range.

• Multiyear forecasts of cash flow and revenue and expenses are extremely useful, even if just for the shock value.

• Opportunity costs (though these can be harrowing for indecisive managers).

• Depending on your business, any number of other measures: matriculation rates, conversion rates, gross margins, cost of sales, return on investment, website impressions, unique visitors, deferred maintenance, investment allocation ratios, order backlogs and sales pipelines
  and so on . . . You know what you need to know, even when GAAP doesn’t.

For example, take my brother-in-law. No, that’s not a joke—he’s a nice guy. Janine, the other half of our marital unit, has seven brothers and two sisters, which means I have nine brothers-in-law on her side of the family. They’re all great individually; as a group, it’s best to just sit back and watch the action (there’s a reason Janine got a masters in clinical psychology).

Ben—an Annapolis grad and successful entrepreneur who regularly reinvents his business as needed—referring to what Janine needed to know about a counseling client, said it most succinctly: “You just need to ask yourself three questions: did he leave a check, is he coming back and does he know anyone else who’s nuts.”

Great managers know where the rubber meets the road.