Within organizations, there are people who enjoy playing with numbers, and then there is everybody else. Those in the Everybody Else category react to financial statements with a glazed look at best or utter terror at worst.
Often, people who feel they don’t have a hope of understanding financial statements are disconnected from the source of the numbers on those statements. The numbers are merely theoretical to them, which makes them difficult to grasp.
Here’s the thing. Every number that shows up in a bookkeeping system or financial statement has its basis in a real-world transaction. (And, if any of them don’t, you’d better start asking why.)
So, if I go to the store and purchase an orange, trading money for said orange, I’ll get a receipt to prove the transaction happened. The store keeps a copy of that transaction, as well, proving that it sold me that orange. The sale of that orange is going to show up in the store’s bookkeeping under an income transaction.
While it seems super obvious to describe how the purchase of an orange affects the financial statements of a store, it’s easy to lose sight of this in the multitude of transactions that any given organization or individual takes part in on a daily, monthly or annual basis.
Unless, of course, you are in charge of the bookkeeping for your organization or household. If you are the one tracking every sale or bank deposit or check written, you can see the direct link between these transactions and your financial statements, which are really just historical summaries of all your transactions for a given period of time.
Did you catch the word “historical” in that last sentence? To put it simply, financial statements show history in numbers.
Like history written in words, the sources of numerical history can be excavated, provided the original receipts, bookkeeping entries, or notes were kept on the real-world transactions behind that history. This is what auditors and accountants do. (They are Financial Historians!)
Whether I am tracking history through the written word or numbers, I use copious notes to help others follow my trail. The memo line in my bookkeeping systems is my favorite field. Not only do my notes allow others to see more information about a given transaction, these notes help me if I have to go back and retrace what happened with a transaction. When I’m studying a word-based history, my notes serve exactly the same functions. The more notes, the better.
The metaphor of financial statements being history in numbers recently dawned on me when I was thinking about how to train someone in bookkeeping tasks.
Through a separate moment of serendipity, I ran across a blog post by Curtis Klotz, CFO of Propel Nonprofits. (It’s the moment of serendipity you encounter when scrolling endlessly through posts on Twitter and you follow brilliant organizations like Propel Nonprofits.)
In his post, called “Audacious Audits: Own Your Numbers, Own Your Narrative,” Klotz makes the case for telling the story of a nonprofit organization through its numbers, providing more descriptive line items to help people understand what the organization is doing. Yes! Exactly! Storytelling through numbers! This is how to make numbers more approachable.
If you’re one of the deer-in-the-headlights folks when it comes to reading financial statements, remember this … the numbers are telling a story of transactions from the past. And, be thankful those financial statements aren’t written in corded knots, like Inca quipu. (This is now the second time I’ve mentioned Inca quipu on The Pragmatic Historian. As a fiber artist by training and a historian who handles finances by career, quipu represent a perfect blend of my interests, which makes me think of them often. But, I digress.)
If you don’t understand any of the numbers in a financial statement, ask for clarification. Don’t simply nod and pretend you know what is going on. While the person presenting the financial statement may not be able to answer your question immediately because there are too many transactions to remember for that, s/he should be able to look up the answer and get back to you within a short period of time.
Once again, if they can’t or won’t provide an answer, there might be something fishy going on with the finances and you’d better ask additional questions or find someone who is more knowledgeable about financial statements to dig deeper.
Several years ago, an employee at a business in my region was caught embezzling money, a LOT of money. How did the business find out? Well, someone should have noticed the red flag this person was flying because she wouldn’t allow anyone to look at or handle the finances outside of herself. Numbers tell the story of an organization and they should not be kept completely secret. The business discovered the embezzlement when the employee went on vacation and someone else had to step in to do the bookkeeping. That’s quite the story this business’s numbers were telling.
Traditional historians, those of you who are more word-based in your history orientation, many of the skills you use to uncover and properly document history would stand you in good stead if you ever decide to follow history in numbers. Consider this suggestion on a fascinating occupation by Kate Barr, president and CEO of the aforementioned Propel Nonprofits:
Now that you know that financial statements show history in numbers, don’t you want to give forensic accounting a whirl? I sure do!