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LOOKING BEYOND FINANCIAL STATEMENTS

Second Edition

BY JAMES OH

Copyright 2014 James Oh

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LOOKING BEYOND FINANCIAL STATEMENTS

About the Author

Acknowledgement

Why and what benefits you will obtain from this invaluable insight book

CHAPTER 1. The Miracle of Looking Beyond

CHAPTER 2. The Big Picture of The Business

CHAPTER 3. Accounting is Both an Art and a Science

CHAPTER 4. Acknowledge, Accept The Significance of Financial Statements and Aim

Beyond

CHAPTER 5. Nine Pointers to Have Quick View of The Financial Statements

CHAPTER 6. Key Components of Financial Statements and Their Relationships

CHAPTER 7. Accept Facts and Figures As They Are

CHAPTER 8. Types of Financial Tools; Their Usefulness and Limitations

CHAPTER 9. Eight Main Categories of Financial Ratios

CHAPTER 10. Key Performance Indicators

CHAPTER 11. True Organization Change Management Start in the Brain

CHAPTER 12. Qualitative Assessment

CHAPTER 13. Continuous Improvement Process is an Essence to The Business

CHAPTER 14. Essential Skills for Looking Beyond

CHAPTER 15. Consistency Pays off Huge and Handsome Dividends

CHAPTER 16. The Magic Touch

CHAPTER 17. Conclusion

Special Thanks

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ABOUT THE AUTHOR

James Oh BAC (Hons), LLB (Hons), CPT, author, speaker and also freelance

accountant. He is a Chartered Accountant with more than 20 years experience in the

corporate fields. Served as Financial Controller both in Malaysia and Singapore; had

broad exposure; diversified experiences together with his passion, enthusiasm and

commitment that make him a significant difference maker.

James brings a truly unique perspective to his writing and talks. He has published five

books, namely Better Than The Best, Letting Go and Moving On, Growing Your Wealth

Exponentially, Mindset Shift: Employee to entrepreneur & Looking Beyond Financial

Statements.

James specializes in helping people to develop practical financial skills, knowledge and

strong mindset. He is passionate about making finance relevant, understandable and

fun. He empowers people to see the invisible and do the impossible and also to apply

financial management practices that suit their organization’s needs and

circumstances. He is passionate about helping people succeed in using their minds to

see new opportunities in life without losing sight of the details. That is to see things in a

new, fresh light and that’s very conducive to creativity.

James Oh’s approach is highly practical hands on, using only financial principle and

theory that people need to know, and then building a sane, sound, solid skills and

knowledge. He is able to provide “real life” advice based on his experience in FC roles

and his experience of managing major Capital expenditure financing, implementing

financial systems, improving and reengineering financial processes and procedures and

achieving ongoing efficiency savings.

James is a CPT graduate from Quest Learning Sdn. Bhd., Competent Communicator

from Toastmaster International and a certified Human Resources Development Fund

Train-the Trainer by Human Resources Development Bhd. (PSMB)

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ACKNOWLEDGMENT

How does one say "thank you" when one has endless list of people to thank? Obviously this

book is dedicated to my late father who had given me abundant freedom, and to my mother who

taught me love and kindness. Many other kind people have touched and transformed my life so

significantly.

Every book is a dream, whether big or small; short or long; obvious or hidden, before it becomes

reality.

Lawrence Loh, my long-time friend, had lent his endless support from the beginning when this

idea was conceived. His brilliant clever and creative editing coupled with his commitment and

his boundless patience in painstakingly reviewing endless revision and re-revisions make this a

timeless read. We used both our gifts and talents to create an excellent book that will serve our

readers with utmost satisfaction. He edited my other four books, Better Than The Best, Letting

Go and Moving On, Growing Your Wealth Exponentially & Mindset Shift; Employee to

Entrepreneur. Lawrence, you are truly a great friend and I can‟t thank you enough for all your

helps.

Finally, nothing would have been possible without the deep understanding and loving support we

received each and every day from our families.

I must say we all formed part of this Dream Team that make this book a reality.

We treasure each and every fan and reader, for reading, absorbing and using the guidebook and

sharing them with those you care, concern and love dearly. Thank you so much for reading our

work. Without you, I could not fulfill my life purpose.

In line with our custom to save the best for the last, we acknowledge and honor the presence of

the Higher Being above from whom we receive abundance of gifts and enlightened insights. As

you read through this book, you will see the Higher Being comes first in our lives.

All my love,

James Oh

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LOOKING BEYOND FINANCIAL STATEMENTS

“Only he who keeps his eye fixed on the far horizon will find his right road.” Dag

Hammarskjold.

WHY AND WHAT BENEFITS YOU WILL OBTAIN BY READING THIS BOOK

The goal of this handy practical workbook is to show you how to achieve the miracle of looking

beyond the financial statements.

To reap this benefit, the reader needs to have the overall view of the big picture of the business.

Solid understanding of the financial statements to serve as a rock foundation is required before

you dig deeper and further to get invaluable insight information. To predict the outcome with

certainty, readers need to have a good understanding of both qualitative and quantitative aspects

of the organization to determine whether the company can deliver its performance or promises to

meet the needs and demands of customers depending on the cap you wear.

With this in mind, this book provides readers complete and comprehensive strategies to enable

its readers to apply its principles and practices appropriately, effectively and wholly according to

their case without any shadow of doubt.

Therefore, each and every chapter should be read wholly, and not in isolation so as to deliver a

consistent, persistent and reliable result.

With increasing pressure to innovate and gain competitive edge, it is more likely that you will

face more challenges in your personal and professional life. Thus, it is vitally important for

everyone to equip themselves with these skills, know-how and mindsets in enhancing their

values through their Profession, Business and Investments using the suggested magic touch.

WHY YOU NEED TO READ THIS BOOK

The book will give you new perspective and direct you to have a proper understanding of the

overall picture, that enable you to see far beyond the boundaries that your eyes can reach. What

matter most is that you can see the invisible and do the impossible.

Seeing clearly which direction I am moving from, will ease your understanding, comprehension

and application. Time is of the essence in life. To move forward with much faster speed, you

need to direct all your energy, effort and enthusiasm on the new approach, if appropriate and

applicable. Otherwise, they will surely and slowly drain off your energy and effort either directly

or indirectly.

WHAT BENEFITS YOU WILL OBTAIN BY READING THIS BOOK:

This book also shows the way for the readers to look beyond the financial statements with

appropriate mind set and approaches to reap its miracle. By strengthening their mindsets, they

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are able to see more opportunities and be able to assess and ascertain the organization more

accurately so as to enhance their chances of success.

Wishing you success and enjoy the journey of discovering the miracle,

With Abundance of Love,

James Oh

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CHAPTER 1. THE MIRACLE OF LOOKING BEYOND

"You are very powerful provided you know how powerful you are." Yogi Bhajan.

Why are some people able to have more success than others? Why do some people make more

money, live happier lives, and accomplish much more than the great majority? What is the real

recipe of success?

They are able to achieve this miracle because they know how to make best use of the opportunity

as compared to the average person. "The average person is 95 percent eyes and only five percent

mind when they invest. If you want to become a professional in the Business and Investment

quadrants, you need to train your eyes to be only five percent and train your mind to be the other

95 percent." – Robert Kiyosaki.

Despite a weak global environment and scarce resources, business today is under tremendous

pressure to deliver stakeholder value and continuous growth. To achieve this new reality, we

need to develop fresh foresight - a burst of insight about the future that produces a new and

radically different way of doing something that will open up invisible opportunities and solve

seemingly impossible problems. It is purely a question of knowing how and where to look, and

taking the time to do the looking. The ability to see trends and identify future opportunities is a

learned skill. This book is written to provide you broader and wider perspectives that will stay

with you forever.

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced

one kick 10,000 times.” Bruce Lee.

WHY WE NEED TO LOOK BEYOND THE FINANCIAL STATEMENTS?

Looking at financial statements, without considering the whole big picture of its operational

environment, is just like construing the tip of an iceberg as its actual size.

Invisible is far more important than what is visible. But, don't get me wrong to say that the

visible is not important at all. Just like the iceberg situation, the visible tip may serves as the last

trigger point for us to avoid from hitting it, if somehow our radar system had failed to detect it

much earlier. To ascertain the situation more precisely and concisely, we need to look beyond

the financial statements.

This Ebook is written with such an intention. Basically, to provide you a sound understanding

and a much clearer picture as a whole, far beyond your naked eyes so that you can obtain its

maximum benefits with ease and confidence. You may then ask why? This is because it is

written to equip its readers with the required tools, mindsets and skills to enable them to zoom in

the various critical key and profound areas to see the invisible.

The financial statements have been traditionally used to serve their stakeholders for its intended

purposes. To have a much greater impact and fun, I prefer to view it from an artist's perspective

rather than an Accountant's. Accountants are just like artists who draw up the company's

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financial statements by using numbers and words instead of paint and brush. For instance in the

income statement, it tells us that the company managed to generate the annual income of X

dollars comparatively to Y dollars in its preceding years. To enhance your appetite and

excitement, perhaps you may read its income statement like a story describing the company's

income performance whether it has improved or deteriorated its sales comparing to its preceding

year, rather than just reading as a boring number, words or graphs at face value, without much

comparison and analysis. By applying the former approach, it will provoke you to think further

as to what main underlying factors caused the change.

At face value, the financial statements tell us lots and loads about your company's performance.

For example, the statement of profit and loss lets us know how much the company sold, and

whether those sales resulted in overall profitability. The balance sheet tells us where the

company stands at that particular date, and gives us a snap shot of its overall financial position.

Whereas, the statement of cash flows informs us how cash moves through the business and

whether operations are supplying or draining cash. All these data are critical for its future plans,

but it's really just a small part of the total knowledge its reader can gain from these exceptionally

enlightening reports.

To be insightful you must take extra mileage by looking beyond the financial statements with

prescribed techniques, tools and analysis in those chapters ahead.

For better understanding, it is also equally important to know each stakeholder‟s purposes and

objectives in looking beyond the financial statements as summarized below:-

i) Management

From the management viewpoint, they need to dress its financial position at its best to attract

more investors and other interested parties to participate in their business activities so as to

achieve the ultimate mission and vision of the company. They are the minds and brains of the

company and they need to understand fully and wholly of its financial statements so as to

improve its operational efficiency and effectiveness by using all its resources so as to build a

long lasting strategic, innovative and competitive edge. They will propel and prosper its business

by overcoming the challenges and attracting success. In short, they will tap their experience,

hindsight and insight to bring the next level of success by using all its available internal and

external resources.

ii) Investors

They invest appropriately and strategically with their available funds so as to obtain their desired

return from their investments. As such, they also need to have insight of the company's financial,

operational performance and its long term plans. To have a better picture and understanding of

the business of their investments, they need to assess both the quantitative and qualitative aspects

of the companies objectively. One good example is the profile, track records and their characters

of its key management. This will give the investors' good indicators of its management

philosophy, culture and value. Knowing their leadership is the key to the company success and

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leadership is reflected everywhere in the company if you choose to see it. Moreover, it also tells

us their direction and how they are moving towards their pre-determined destination.

iii) Suppliers

The financial statements is not only useful for them to ascertain their customers' financial

capability to pay their bills as it become due, but also the credit limits and period which fits into

their operational and financial needs. To establish a long term relationship with your customers,

you also need their feedback on their future plans, needs and products.

iv) Lenders

Their requirements are quite similar with the roles of the supplier. However, their needs are more

inclined to their long term financial assistance and repayment term. As usual, the lenders will

like to assess their exposed risks in view of default. What are the assets and liabilities both

in short and long terms. What is far more important is their cash flow especially from its

operations.

HOW TO LOOK BEYOND?

Fig 1. Fig 2. “If I have seen further, it is by standing on the shoulders of giants.” Sir Isaac Newton.

To look beyond is to drill, delve and dig deeper into these statements, just like we extract the

juice of sugar cane from the machine. Couple with using some mathematics and analytical tools,

it will open up a whole new world of meaningful, powerful and useful insight information which

we would otherwise not be able to see in this light. Hence, each respective stakeholder will make

good use of this information to address their pre-determined objectives and purposes. These

useful analytical tools will be delved more in depth at the later chapter.

It will then clearly reflect its relationships among the accounts and the impact they have on one

another. Do you agree that by using different ways of measuring the same numbers will result in

new perspectives and insights?

The more of these tools you learn to use, the more you will get done each day. Let's be proactive,

not reactive.

In general, your financial statements can tell you things such as:

Whether your company has sufficient liquidity

Whether the company is holding too much inventory

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Whether you need to revisit customer payment terms

Whether you are charging enough for your products and services

How to put your assets to better use

Whether serious financial problems are on the horizon

How well your company stacks up to competitors

How well the company fares according to industry standards

PREPARE IN ADVANCE AND ENSURE IT WORKS FOR YOUR LONG TERM

BENEFITS

“Ask for what you want and be prepared to get it.” Maya Angelou.

The more you know about your business, the better its chances of success. Noticing potential

issues before they blossom into full-grown crises can save a business from ultimate failure.

Similarly, making good use of the available opportunity and overcoming its challenges will also

enhance its success. Strategic planning for its long term sustainable growth is critically

important. You need to look at the industry outlook, the changes that are likely to impact this

industry and other external factors that may need your attention.

“There is force in the universe, which, if we permit it, will flow through us and produce miraculous results.

Mahatma Gandhi.

By looking beyond financial statements, your chances of a miracle happening in favor of you are much higher.

Fig 3. The Miracle of Looking Beyond.

Fig 4. Beer

“Miracles, in the sense of phenomena we cannot explain, life itself is the miracle of miracles.” George Bernard

Shaw.

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CHAPTER 2. THE BIG PICTURE OF THE BUSINESS

“In order to properly understand the big picture, everyone should fear becoming mentally

clouded and obsessed with one small section of truth.” Xun Zi.

Have you ever wondered why there are an increasing number of corporate scandals? This may be

not the end, but the beginning if the greatest concern is not addressed. You may ask what

actually hinders them from concentrating on what matter most in their business.

What is the greatest concern?

The greatest concerns in today's business are that people exhibit misplaced priorities and

impatience in seeking unrealistic profits and power instead of doing appropriate things to sustain

orderly growth and long term success.

Then what is the Big Picture of the business?

Businesses are started by providing solutions to the problems faced by certain group of people in

the society. These solutions are the added values to the Society. By now, you can figure out what

and how you can actually make money while solving that particular problem you have in mind.

This then forms the Big Picture of the business.

What organizations and individuals started out to become and what they have evolved into

become are two different things altogether. The path toward change and progress may take many

twists and turns; expected or unexpected, knowing or unknowing, express or implied. How they

evolve reflects on whether they have really focused on their own initial big picture?

Senior Executives need to perform quality work as they face mounting and accelerating tasks in

keeping the company healthy. They face increasing competition and have to keep ahead of the

marketplace. These challenges may render the senior executives so hectic, that they side track

their attention from the Big Picture thinking. This is especially true for those who are not fully

prepared to handle such challenges or much less in developing Big Picture thinking. This is also

compounded by the burnout of the Seasoned Executives. This, in combination, led to impairment

from optimum achievement as the result of young and mid-level executives do not really know

what it takes to succeed in the long term. There is a high tendency that the organization may not

be what it started out to be. The management of the organization may be either tired or

complacent.

In fact, businesses of all sizes are surrounded with opportunities, competing information sources

and large amount of uncertainties. Therefore it is crucial to stay focus on the Big Picture to take

appropriate action to turn these opportunities to your favor. Failure to prepare for the future

spells certain death for business. Never take the term lightly as it is often used but rarely applied

correctly.

With increasing pressure to innovate and gain competitive advantages environment, Businesses

demand versatility and vigilance. Companies need to heed messages from the marketplace and

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be wary of what are the changing market conditions, new global business imperatives, new

partnering concepts, and other changes outside their influence that may profoundly affect them.

Below are some pointers for company to conduct a planning retreat to assess its own Big Picture,

ascertaining its specialty and charting the process forward:-

Fig 5 Continuous cycle

THE BIG PICTURE

The clarity of its core purpose and goals in providing specific added value:

- What is their specialty? It may be Training, Trading or Technology.

- Whether the various working groups within the organization are aligned to serve the true

purpose- the business.

- The management must be comfortable in the uncomfortable zone that is full of uncertainties to

seek continuous progress.

- Concentration with passion in what they are doing.

- Persistence and perseverance with their thoughts, words and actions.

- Optimum efficiency through best usage of all its resources though qualitative leadership.

SUSTAINABLE GROWTH

- There is a constant need to step up growth and improve profitability through 4 Ds (i.e. Design,

Desire, Differentiate and Delight).

- Cautious but certain with their action plans with great confidence and faith. Action trumps

everything.

PEOPLE-PERFORMANCE-PRODUCTIVITY

- Management seeks appropriate perspectives and needs to be recharged regularly.

- Management needs to develop better information to assist themselves to make better informed

and intelligent decisions to deliver expected results.

- To align, balance and strategize all departments to be in a more harmonious environment

towards its overall organizational goals.

- Bring up its people potential and use them wisely for the best interest of the company.

- Propel people for change and growth and not status quo through more holistic approach.

CONTINUOUS IMPROVEMENT PROCESSES

- Better internal coordination of companies‟ activities by making the process simple and shorter

if appropriate.

- Better monitoring for speedy rectification especially those critical success areas through Key

Performance Indicators.

- Emphasize more on forward processes such as making investment for future company success.

EXTERNAL ENVIRONMENT

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- Be more open minded and be open to all possibilities. This is because unexpected and favorable

outcome may turn out under least expected circumstances.

- stay versatile and adaptable to new opportunities and environments.

- be vigilant and sensitive to the external changes especially those which have significant effect

on the overall organization‟s future.

The big picture comprises of everything the team members do, their ultimate goal and how it

relates to everything around it. It definitely doesn‟t diminish the importance of details, but draws

us to step back periodically to take a high-level look. It will ensure members are on course in

heading toward their ultimate goal.

This big picture will serve as a good navigator when looking beyond the financial statements.

You will be rest assured to be much clearer once we walk you to more in-depth and insightful

knowledge.

Stay focus on your big picture precisely as the quote below:-

“The successful warrior is the average man with laser-like focus.” Bruce Lee

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CHAPTER 3. ACCOUNTING IS BOTH AN ART AND A SCIENCE

“In the big picture, architecture is the art and science of making sure that our cities and buildings

fit with the way we want to live our lives.” Bjarke Ingels.

How many of you agree that Accounting is both a Science and an Art? I do.

Why Accounting is a Science?

This is because it is based on some predefined principles or knowledge and emphasis on

experiments. Therefore, it is right to say that accounting is a science because it emphasizes on

recording, classifying, summarizing, business transactions on the basis of some predefined

principles. But in accounting we don‟t care for the reasons why there is an increment or

decrement of the cost; profit or loss in that particular business. So accounting is not pure science.

In simple words, science establishes relationship of cause and effect.

Accounting is also science in the sense that it comprises of rules, principles, concepts,

conventions and standards. All these form a body of knowledge which has recognitions all over

the world. The term GAAP denotes generally accepted accounting principles. At present we have

an International Accounting Standards Committee also.

The definition of science includes attaining knowledge through study, practice, investigation, and

careful observation. Therefore its outcome / effect can be ascertained / predicted with certainty

through persistency and consistency in translating the transactions and events in the financial

statements.

Why Accounting is an Art?

Accounting is an art because it can be learnt by practice and not by mere listening to it like

scientific rules but rather an activity to do something in one‟s own way. For example it can

present numbers in certain classification best suited for their stakeholders. An excellent example

is selecting the required accounting policies and practices best suited to their intended agenda. In

short, there is also an element of creativity especially when you do complex accounting in

Derivatives, hedging or off balance sheet items. However it is not meant to fudge the records

similar to the famous Enron case. Accounting is an art of summarizing, recording and classifying

business transactions.

The word „art‟ is more appropriate because every accountant have different qualities in viewing

the accounting system because he will do his work with his conservative interpretation. The

account may to a certain extent be influenced by the personal judgment of the accountant.

Therefore, accounting is more inclined to be an art.

Moreover, if someone is quick, efficient and artistic, he may then use his creative skill,

emotional power and imagination to produce his sexy figures for his financial statements, like a

typical artist who draws his painting or sculpture or art work.

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No doubts, there are some guidelines or principles to follow. However, there are some rooms for

flexibilities, estimations and creativities involved when translating transactions and events into

the financial statements.

Like a painting, accounting is the description of the financial condition (balance sheet and

shareholder equity statement) and results of operations (income and cash flow statements) of a

company as of a period of time or specific date. There are rules by which the statement should be

made, but there is a lot of room for management interpretation and estimate.

Accounting is telling stakeholders what the company operations look like, just like the manner

where a painting tells the viewers what the scene looked like. Art is an emotional expression

through the application of knowledge comprising of some accepted theories and rules.

Thus, Accounting is an art of recording financial transactions and events in a set of books;

classified in desired categories and the information summarized in a suitable manner to

concerned persons to prove whatever point one wishes to establish.

It is therefore more accurate to say that Accounting is both a Science and an Art. What are far

more significant are not the argument but its true understanding and comprehension for the

chapter that lies ahead.

With this view in mind, you will have better understanding as we walk into more in-depth main

discussion of looking beyond the financial statements. Stay clear of its subjectivity, personal

judgment and bias involved when interpreting the financial statements. Everything counts here

namely policies, processes, principles, performance, philosophy, profit and people.

In summary, “similarly, in the big picture, Accounting is the art and science of making sure our

past, present and perpetual business performance fit with the way we want to measure our

business.” James Oh.

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CHAPTER 4. ACKNOWLEDGE, ACCEPT THE SIGNIFICANCE OF FINANCIAL

STATEMENTS AND AIM BEYOND

“To a great mind, nothing is little,” Sherlock-Holmes.

What is Accounting?

Accounting is a process of identifying, classifying, measuring, and then translating the effects of

economic events upon a specific economic unit. This description is incorporated in the objective

of financial statements which is to provide information about the financial position, performance

and changes in financial position of an entity that is useful to a wide range of users in making

economic decisions.

Thus the purpose of financial statements includes a decision making role. The decision

usefulness paradigm has dominated accounting theory related to financial reporting since around

1970 (Coy, Fischer, & Gordon, 2001).

Miller (1990) states the idea that accounting information should be useful made “decision

usefulness the primary test for determining which of several competing practices should

be generally acceptable”. However, financial statements preparers also acknowledge the

accountability role of financial information and that financial information is used for political

and social decisions in addition to economic decisions (Hooks, Coy, & Davey, 2004).

Accountability encompasses a responsibility to give an account to those to whom one is

accountable and stems from the stewardship responsibilities of company managers. In particular,

there is a conceptual relationship between corporate governance and accountability.

Accountability and decision usefulness are inter-related as “those users who wish to assess … the

accountability of management do so in order that they may make economic decisions” (IASB,

2008, para. 14 of 1989 framework).

Economic decision making is grounded in an assessment of the firm‟s ability to generate cash, its

profitability and its financial position. In this respect, the financial statements are inter-related to

provide information on transactions and events that are useful in making judgments about the

ability of the entity “to pay its employees and suppliers, meet interest payments, repay loans and

make distributions to its owners” (IASB, 2008, para. 15 of 1989 Framework).

International Financial Reporting Standards (IFRS) are designed as a common global

language for business affairs so that company accounts are understandable and comparable

across international boundaries. They are a consequence of growing international shareholding

and trade and are particularly important for companies that have dealings in several countries.

They are progressively replacing the many different national accounting standards. The rules to

be followed by accountants to maintain books of accounts which is comparable, understandable,

reliable and relevant as per the users internal or external.

A focus on economic decision making leads to a technical approach to reporting. To facilitate

these IFRSs set out recognition, measurement, presentation and disclosure requirements dealing

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with transactions and events that are important in general purpose financial statements. The aim

is to achieve consistency and comparability in the reporting of transactions and events. Within

the framework of IFRS, preparers provide information to assist various parties (e.g. shareholders,

employees, creditors and the public in general) in making decisions about the future.

Decision usefulness is affected by relevance and reliability. Relevance exists where the

information provided is capable of making a difference to a decision. Reliability of information

means that users can depend upon it to represent economic conditions or events (IASB, 2008,

para. 31-32 of 1989 Framework). Both accountability and decision usefulness perspectives

are contingent upon the quality of the information being reported.

What are financial statements?

Financial statements are scorecards. They indicates the strength of balance sheet at a particular

date, and its earnings and cash flow during the reporting period and their relationship will be

discussed in more in-depth at the later chapter.

From the above framework, it is clear that these statements have played significant roles and

functions in the business society. Acknowledging and accepting its significance is the very first

step to aim beyond.

Why you need to Aim Beyond?

“If you always put limit on everything you do, physical or anything else. It will spread into your

work and into your life. There are no limits. There are only plateaus, and you must not stay there,

you must go beyond them.” Bruce Lee

i) The main aim is to achieve consistency and comparability in the reporting of

transactions and events. Thus you need to seek more in-depth and insight

information of the entity.

ii) To make a fair and honest assessment of its financial health, hidden

potentials and opportunities to seek further growth and long term success,

based on its relevance and reliability of information. Relevance exists where

the information provided is capable of making a difference to a decision

whereas Reliability of information means that the users can depend upon it

to represent economic conditions or events.

iii) To have better understanding of how the business is being run to achieve its big picture

and purpose based on the quality of the information being reported.

How do we make such a fair and honest assessment?

By digging deeper through various financial tools to make comparative, useful and meaningful

analysis so as to establish its relationship with other related transactions and events rather than

19

relying on its absolute figures. More in-depth discussion of the financial tools will be discussed

as we walk through the relevant chapter that lies ahead.

Observation, dialogue and personal interview with the relevant key management staff will also

be embarked, if such a need arises. By following through the updates, companies' circulars and

financial projections, we are able to anticipate their future performance with much more certainty

in view of the foreseeable changes or foresight from the key management staff. With adequate

insight industry knowledge; information and vision of their future, we will be in much better

position to predict their future performance. This will also enhance our intuitive sixth sense

through systematic process of analysis, scrutiny and observation.

This is because those who able to see the invisible can then do the impossible.

CHAPTER 5. NINE POINTERS TO HAVE QUICK VIEW OF THE FINANCIAL

STATEMENTS

20

How many of you truly want to know how to have a quick view of a company‟s Financial

Statements? This will make it easy for you to discuss with the financial communities on the

financial issues of a company.

When we talk about Financial Statements, what we are referring to is the Company‟s Report and

Accounts, usually found on the website of listed public companies.

1. The Auditors Report

– should be the first quick check.

This is usually found at the front of the Accounts and it has been drawn up in accordance with

Generally Accepted Accounting Policies so as to give a 'true and fair' view of its financial

performance. Watch out for any „qualifications‟ which could highlight any financial problems. A

clean report is generally preferred.

2. Principal Activities

Take a quick look at the Directors' report as to what are the company's principal activities and the

industry it is involved in. This gives you an overall view of the company and its industry where

you should focus on. Each and every industry has its own uniqueness and characteristics.

3. Sales – or Turnover, Revenue.

Sales are reflected on the Income Statement. Note its historical trend and any significant

fluctuation; and the cause, if applicable.

4. Profitability

The Gross Profit and Operating Profit, both before and after tax, will suggest whether they are

selling above their costs. Whereas the percentages against their sales will give you the idea

whether its profitability is increasing or declining. As such, the trend analysis may give you a

good basis to predict its forecast. However, bear in mind that the historical trend will not

guarantee its future performance.

5. Return on Capital Employed (ROCE)

Suggesting the return from what the company has invested in. The Capital Employed is basically

made up of Shareholders Funds (Share Capital plus Reserves such as retained profits or less

Accumulated Loss whichever is applicable).

ROCE is found by dividing the Operating Profit by the Total Capital Employed or Total Assets

or Net Assets. This percentage indicates to you whether its return is lower or above the interest

rates.

6. Working capital position

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Take a quick look of its ratio by dividing its current assets against current liabilities. This will

give us its liquidity position or the overall situation, i.e. stock, debtors and creditors. Its historical

trends will suggest to you whether its liquidity position is improving or declining, an idea of its

management efficiency to a certain extent. Most importantly is its cash position to pay its bills

when due.

7. Retained profits / Accumulative Loss

The cumulative bottom line. Retained profits will be the surplus to its shareholders' fund whereas

the accumulative loss will reduce its shareholders' fund. The former will allow the company to

distribute out through dividend or bonus share and not the latter. In short, it represents a

company's cumulative profits after dividends from the time of its inception. In this sense, it is a

residual.

On the other hand, the accumulative loss will shrink its shareholder funds which may ultimately

cause capital reduction.

8. Gearing

The gearing ratios reflect the relationship of its debt to equity or total capital employed or total

assets. It indicates to you as how many times of its debts against the capital and also the interest

expense the company has to bear. As such, it gives rise to the situation that it will have adverse

impact should the interest rate be on the increasing trend. If the ratio is at high side, they will be

answerable to the lenders. However, if it is at the low side, the question arises whether they

should borrow more to invest.

9. Notes to the Financial Statements

Notes are usually found at the back of the statement. It is rewarding and revealing to take a quick

look at its Significant Accounting Policies. Look exactly at what type and nature of assets the

company has, fixed and current; long and short term liabilities as well. Directors Remuneration is

of interest and other key mandatory expenses will also be found here. All these notes will usually

be reference to the items in the respective Income Statement and Balance Sheet.

Trust the above discussion may be used as a good checklist or guide as how to have quick view/

Bird eye's view of any Financial Statements to determine whether it is within your investment or

lending criteria.

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CHAPTER 6. KEY COMPONENTS OF FINANCIAL STATEMENTS AND THEIR

RELATIONSHIPS

Fig 6

A financial statement is more than just a snapshot of your business‟ health that you provide to

shareholders or potential investors or other stakeholders. It‟s also a powerful diagnostic tool for

the users to evaluate the organization‟s strengths and weaknesses so that they can be used to

draw up the forward chart accordingly.

Its key components and their relationships are briefly explained below:

1. Income Statement or Profit and Loss Statement

Fig 7.

It attracts the company's stakeholders‟ attention because it shows the company's "bottom line":

its earnings, or profit. Most of the income statement details the company's operations. Through

comparison of its current and preceding year earnings, you will find out whether its earnings is

growing or declining. If you find both the figures for sales and operating expenses are also

higher, then it is likely indication that the company is growing physically as well. In order to

generate more money, it is increasing its capacity to produce more of whatever it sells.

However, it is directly linked to balance sheet, cash flow statement and statement of changes in

equity. This is because the increase or decrease in net assets of an entity arising from the profit or

loss reported in the income statement is incorporated in the balance sheet at the period end.

Whereas the profit and loss recognized in income statement is included in the cash flow

statement under the segment of cash flows from operation under adjustment of non-cash

transactions. Finally the Net profit or loss during the year will also be reflected accordingly in

the statement of changes in equity.

One important thing that the income statement doesn't show is how the company is paying for

this growth. To find that, you need to look at the cash flow statement.

2. Cash Flow Statement

Fig 8.

The Cash Flow Statement shows how the company is paying for its operations, by detailing the

"flow" of cash between the company and the outside world. The positive numbers represent cash

flowing in, whereas the negative numbers represent cash flowing out from the company. The

operating activities generate money by selling its goods and services.

Whereas the other two sections of the cash flow statement, Financing, and Investing, reflect the

other two ways the company obtain its cash. Financing means "raising" money by issuance of

shares and bonds. The third section shows how the company is funding its investments for future

23

growth. Usually investors prefer the stock of company who can pay its investment out of its

operations rather than turn to "financing". This is because financing will have impacts to the

company bottom line. Issuing new stocks will lower the value of each individual share whereas

issuing bonds commits them to making interest payments which will punish future earnings.

This company has a very "healthy" cash flow if its operations cash inflow is more than sufficient

to cover cash used for investing.

Here it begins with "net" earnings from the income statement and then adjusting it by removing

all components that do not entail actual cash flow. For instance depreciation, which is a "paper"

expense, has been taken out of earnings. So by adding it back in, you're removing its effect.

In short, it is primarily linked to balance sheet as it explains the effects of change in cash and

cash equivalents balance at the beginning and end of the reporting period in terms of the cash

flow impact of changes in the components of balance sheet.

3. Balance Sheet

Fig 9.

The balance sheet reflects its assets, which is what a company owns, and its liabilities, which is

what it owes. Their difference is the company's net worth, on paper. The catch here is that the

fair market value of many assets can be very different from the "book values" shown here. As

such, people looking for "value" stocks need to do more research, beyond the balance sheet.

Generally, investors prefer its current assets are greater than current liabilities by a comfortable

margin. To be more conservative, they often exclude inventory from current assets when they

calculate this computation. This indicates that the company is likely to suffer a cash shortage

during the following year, which may force the company to issue new stocks or bonds to

survive.

Hence, Assets - Liabilities = Equity or Net Worth, just by the definition of equity. A balance

sheet will also show how equity has actually been "built up" over the years, from stock sales and

retained earnings. Assets are things that a company owns that have a value. They can either be

sold or used by the company to make products or provide services that can be sold. It also

includes things that are intangible in nature but have value such as trademarks and patents.

Liabilities include all kinds of obligations namely obligations to provide goods or services to

customers in the future.

However, another important issue which the balance sheet does not take into consideration is its

human assets such as the relationship between its management and its employees.

4. Statement of Changes in Equity

Fig 10.

24

Statement of Changes in Equity basically reflects the movement in equity reserves as reported in

the entity's balance sheet at the beginning and the end of the period. It includes the change in

equity reserves arising from share capital issues and reduction and the payment of dividends.

It is directly related to balance sheet and income statement.

5. Notes To The Financial Statements

This should be form part of integral parts of the financial statements. It provides additional

information in a company's financial statements that are left out of the main reporting

documents, such as the balance sheet and income statement. This is done mainly for the sake of

clarity because these notes can be quite long, and if they were included, they would cloud the

data reported in the financial statements.

Append below are the key concern areas you should look for:-

i) The disclosure and explanation of significant transactions and events in the accounting

period.

ii) Obligations disclosed, but not recognized in the financial statements

iii) Resources disclosed but not recognized in the financial statements

iv) Contingent liabilities

v) Commitment notes

vi) Disclosure regarding operating leases

vii) Significant Accounting Policies

Companies are required to disclose the Accounting policies that are most important for portrayal

of the company‟s financial health and results. These often require management‟s most difficult,

subjective and complex judgments.

These notes provide some of the most important, relevant and pertinent information that can alert

readers to the effects of transactions and events they might otherwise overlook.

In short, the financial statements are very useful, meaningful and powerful business diagnosis

tools if the user truly comprehend its functions, limitations and relationships.

Fig 11 Relationship between F/S

Fig 12

25

CHAPTER 7. ACCEPT FACTS AND FIGURES AS THEY ARE

Are you aware that there are lots and loads of information projected by a person during any

interaction? This information is not just about what has been spoken, but a lot to do with the

unspoken as well. This is true if you know what to look out for in the first place? Same principles

apply when you are reading the financial statements.

Why the numbers in the financial statements are important?

The numbers are measurements of all the business transactions or events that had taken place in

the reporting period as they are.

All these transactions are then translated in the currency that are ascertained through actual

value, estimated or based on certain accounting policy so as to report its fair value.

The numbers as absolute figures by themselves are less meaningful and impactful than if you

express them to its other related transactions. For instance Profit of USD20, 000 as compared to

20 % gross profit by dividing the gross profit to its sales figure, which we will discuss further

with other financial ratios in depth at the chapter ahead.

In this connection, caution needs to be taken if we want to assess the financial statements fairly

and justly. The fundamental question arises is whether the facts and figures lie or not.

Admittedly, facts and figures are just as they are. It is very much dependent on the users to give

effect and meaning to them. You may argue that Figures Don‟t Lie, but Liars Do Figure. To

achieve our objective, we need to stay open minded, non judgmental and non resistant when

reading through this book and the briefing by its key management to ensure its un-biasness,

preference and liking.

It is also our duty to conduct due diligence when examining financial statements by looking

beyond with relevant tools at the later chapter. To ensure fair assessment, we need to be aware

not only of the old saying that states “figures will not lie,” but also a new saying i.e. “liars will

figure.” It is now up to us, when using these analytical tools, to prevent the liar from figuring; in

other words, to prevent him from perverting the truth, in the interest of some theory he wishes to

establish by raising appropriate and pertinent questions based on those findings from those tools.

Without going in depth we cannot determine whether “figures lies or not” and the same may be

said of letters, marks, and other signs of thought. But the manner in which many use figures, in

order to carry a point, has sometimes tempted us to believe that the hasty remark of the Psalmist,

if paraphrased thus – “all men” – who deal in statistics “are liars,” – is not far from the

truth. Figures won‟t lie; but men that draw up the tables may.

What lies ahead is far more important, that is how we are going to deal with them to meet the

expectation of each stakeholder‟s goals and objectives. From the key management‟s stand point,

they need to dig deeper, study and understand the financial statements in details in terms of their

26

relationship; with its underlying causes; and its effective solutions so that they can manage them

and deliver far better performance to match the expectation of their stakeholders.

Management will then be able to nurture and navigate the company direction by managing its

processes and resources to materialize their missions. Hence, they will enhance their skill,

mindsets and experience to overcome the everlasting challenges the company is facing.

Similarly, investors will also perform their functions by investing into those exceptional

incredible companies to deliver their return that match their investment portfolio objectives.

However, people often times turn blind eyes to those suspicious signs; ignore their intuition and

follow their emotions so as to grab the quick profit especially the private investors who lacks

experience and are lead by their emotion and temptation.

Seeing is believing. Seeing is also deceiving. Stay alert and vigilant all times by using your

observation, listening skills and be sensitive and curious about those clues especially when you

are speaking to the key management or when visiting their operating environment. To support

your basis, you may need to use financial analysis as your foundation to scrutinize and

substantiate further.

One good gauge of a company is your first impression when you step in their offices. Observe

their leadership and the manner they carry out their roles and responsibilities. Another way is to

raise intelligent but diplomatic questions, so as to ascertain how they walk their talks especially

in those critical success areas.

Key management, being central to the organization needs to be assessed on their qualitative

aspects such as their individual integrity, characters and mission. More importantly, is their

guided principle and their company‟s culture.

Much is dependent on the game you want to play, either offensive or defensive; the employed

strategy, either long or short term and the ultimate objectives.

Always use the big picture as a guide to enhance your chances of success, plan out your strategy

and map out how you can use it to your maximum advantage and benefits. Much is dependent on

the cap you wear. Things may be even more complicated especially when you are wearing more

than one cap.

Uncertain External Factors such as regulatory; technological and environmental changes will

have huge impact on the business and the respective industry. All parties view this area highly.

You need to stay open and hungry if you want to obtain maximum useful information and

intelligence of the facts and figures.

One main purpose of the Interpretation of financial statements is to ascertain whether the

company is working towards its sustainable business growth and profitability in line with its

mission statements. To see the Big picture, one must be aware of the limitations of financial

statements; supplemented by its analytical tools; external observation and other pertinent

external factors.

27

A key approach is to ascertain consistency of the facts and figures that had been taken is in line

with its Big picture. If not, what remedial actions had been taken to address the inconsistency? Is

it sensible or a viable long term solution to achieve the mission? Management's strategy,

approach and process to achieve it are key. To ascertain more accurately, readers need to

understand the key performance indicators of that particular industry, its key critical success

factors and how they address those key concern areas.

An example is that innovation and creativity are key concern areas for the technological industry.

How well Management keeps up with the changes, innovation and creativity may give readers

some clues. The focus and persistent actions in those areas will give us some clues as to how

they beef up their unfair competitive edge to a certain extent. Their hindsight, insights and

mindsets will be the determining factors for their chances of success. Although knowledge and

mindsets are invisible, they are well reflected through their daily actions. How they keep abreast

of the business intelligence, talents and networking will surface if we know where and what to

look for.

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CHAPTER 8. TYPES OF FINANCIAL TOOLS, THEIR USEFULNESS AND

LIMITATIONS

Fig 13

“If you can‟t measure it, you can‟t manage it.” Peter Drunker.

Do you agree that sustainable business growth and mission requires effective strategic planning,

resources and financial management? To provide key indicators of the organizational

performance, several financial tools are used to shed some light on its performance before we

can shape it further. These tools are employed to dig deeper and further on the financial

statements so as to have a better understanding of financial results, trends and health over time.

Careful interpretation in the proper context will provide not only high quality insightful

information, but also quick indicators to those areas which need immediate attention and

rectification if they are provided on time. The primary aim of these tools is to contribute towards

improving measurement in term of efficiency and effectiveness. Thus, these tools will enhance

characteristics underlying decision usefulness in term of its relevance and faithful representation

in assessing performance. The enhanced qualitative characteristics (i.e. understanding,

comparability, verifiability and timeliness) can improve decision usefulness when the

fundamental qualitative characteristics are established.

Usually, managers will use these tools to pinpoint their strength, potentials and weaknesses from

which strategies and initiatives can then be formulated. Funders and other stakeholders may use

them to measure the company they are evaluating against others and derive their assessment and

judgments concerning the management effectiveness and mission impact.

Just like any other tool, it has its usefulness and limitations. Each tool compliments and

supplements each other with ease to give clearer and better ideas of its business operation so that

you can draw up your strategies forward.

Type of Financial Tools and its short description:-

1. Financial Ratios

Financial ratios are traditional financial statement analysis tool. These ratios take information

from the company and financial statements and calculate economic indicators for comparison to

another company or the industry standard. Eight main types, categories and purposes will be

discussed in detail in the following chapter.

a) Horizontal Analysis

29

A horizontal financial statement analysis compares current financial statements to its preceding

year. This can be easily done by putting several years of financial statements in a side-by-side

comparison format and enables business owners and managers to review the results over several

years to determinate whether revenues, expenses, assets or liabilities have increased, decreased

or stayed the same. Alternatively, companies can also use a horizontal analysis to compare

changes in dollar amounts or a percentage change when comparing financial statements.

b) Vertical Analysis

A vertical financial statement analysis is conducted using common size financial statements. A

common size financial statement shows each item on a financial statement in a percentage figure

for each statement line item. A vertical analysis gives managers a different option for reviewing

financial information; managers may be more comfortable looking at percentages rather than

dollar amounts. The percentage figure represents how individual line-item amounts compare to

the aggregate total of the financial statements.

c) Trend Percentage Analysis

A trend percentage analysis is an enhanced horizontal analysis technique. These analyses help

companies identify consistent revenues or expenses from past accounting periods. Thus, it helps

managers make business decisions regarding future operations. Companies will use a specific

financial statement as a base year for comparing all future financial statements. Changes for each

future time period are translated into a percentage when compared to the base financial

statement.

Financial Ratios- Uses and Limitations

i) Benchmarking Financial Ratios

Financial ratios are generally less useful on a stand-alone basis; they may be benchmarked

against something by comparing its ratios against the following:

a. Industry norm

The most common type of comparison is the comparison of the financial ratios of company they

are evaluating to the industry average. Ratios per industry can be either obtained from

Bloomberg and Standard & Poor‟s. These are good and reliable sources of general industry

information. However, extra caution must be taken because there are several companies included

in an index that can distort certain ratios. One good example is when we look at the food and

beverage ratio index, it will include companies that make prepared foods and some that are

distributors. The ratios in this case would be distorted because one is a capital-intensive business

and the other is not. As a result, it is better to use a cross-sectional analysis, i.e. individually

select the companies that best fit the company being analyzed.

b. Aggregate economy

30

It is healthy to analyze a company's ratio over a full economic cycle. This will help you

understand and gauge a company's performance in changing economic conditions, such as a

recession or season.

c. The company's past performance

It is similar to a time-series analysis, which looks mostly for trends in ratios.

Limitations of Financial Ratios

a) It is difficult to find a similar set of industry-average ratios because many large companies

operate different divisions in different industries.

b) Profits are affected by high inflation rate, thus a ratio analysis of one company over time or a

comparative analysis of companies of different ages must be interpreted with caution.

c) Understanding seasonal factors in any business can reduce the chance of misinterpretation. For

example, a trader‟s inventory may be high in the preparation for launching of new

models/products. As a result, the company's accounts payable and inventory will be high.

d) When a company have combination of some good and bad ratios, making it difficult to

determine whether it's a good or weak company.

e) When there are different significant accounting policies and practices within the same

company over the different periods of comparison.

f) The danger of generalizing about whether a ratio is good or not.

g) Pure comparison of two different companies from different industries without taking into

accounts the different industries and external environment might be misleading. Legislation and

market structure may have very significant impact.

h) Comparability may be impaired and affected by estimates; assumptions and different

accounting policies and practices. Hence ratio analysis is less useful in such situations.

i) Ratio analysis usually explains relationships between past information whereas users are more

concerned about current and future information.

Overall, ratio analysis conducted in a mechanical, unthinking manner is dangerous.

Advantages of Ratio Analysis

1. It helps in comparing companies of different size with each other for more insightful

information.

2. It is useful for trend analysis as it involves comparing a single company over a period.

3. It highlights important information in a much simpler manner and makes it easy to make better

judgment of a company performance than reading the whole financial statements.

2) Key Performance Indicators /Key Success Indicators (KPI/KSI)

KPI or KSI is a tool you can use to identify the things that really matter in order to be successful.

Excellent customer service, employee satisfaction, enthusiasm and office organization are all

31

desirable characteristics of a company. Hence the right set of KPI should be closely linked and

aligned well with the objectives and strategic direction. Without it, it is just like a captain without

a compass.

KPI basically tell us an action that needs to take place. If a KPI has been correctly assigned to a

company, it will have a “flow-on-effect” which will in turn benefit the company. The entire

company can monitor and fix problems associated with the success rate of the company‟s KPIs.

KPIs can create a type of benchmarking within one‟s business. If they are developed uniquely to

fit the needs of a company, they will provide a solid base of knowledge. This is because seeking

to improve compliance with quality, safety and social responsibility standards and regulations,

while ensuring alignment with strategic objectives is unavoidable and necessary part of any

business aiming for success. In short, they are used by organizations to measure, monitor and

manage performance; they allow employers/employees to envision what needs to be done to

improve their organization.

Above all, KPIs are an invaluable form of business intelligence. Once determined, they can be

used to educate every member of the company with regards to developing a strong team

approach to business. We will deal more in depth at the chapter that lies ahead.

KPI - Advantages

a) KPIs enable management to stay on its course to success. Management will make the

necessary changes to turn things around if things go wrong.

b) It also enables the organization to build its competitive edge.

KPI - Limitations

a) They can be expensive to use and restricted. For example you cannot quantify staff morale.

b) They have limitations to the exactness of the results as they are more like a rough guide rather

than concrete measurement.

c) They can be difficult to change once it has been designed.

However, it is wise to use both tools concurrently as they can supplement and complement each

other to achieve what the company ultimately wants. Bear in mind that the ability to see trends

and identify future opportunities are learnable skills that need constant practice to sharpen them.

In a latest development, over 30 regulators across the globe have mandated Extensible Business

Reporting Language (XBRL) as the required electronic reporting format. XBRL provides an

identity tag for each individual item of data, whether numeric or textual. This tag is computer

readable and allows the information to be used interactively. Hence, it hopes to enhance

accuracy, transparency and flexibility. A digital format supports more informed business and

investing decisions, includes greater comparability within and across enterprises.

32

CHAPTER 9. EIGHT MAIN CATEGORIES OF FINANCIAL RATIOS

Fig 14. Fin Rtaios

Financial statements reflect the effects of the business transactions and events on the entity

during the reporting period. To view its financial strength, we need to view it as a whole and its

close relationship in relation to one another.

To compare and measure the financial health relationship of an organization, the financial ratios

were developed and used as a yardstick to ascertain its financial condition and performance.

Hence, our discussion will be strictly on what are the financial ratios and its meaning.

1. Leverage Financial Ratios

They reflect the percentage of a company‟s capital structure that is made up of debts or liabilities

owed to external parties, other than shareholders. It tells you the relationship between the internal

fund and external debts. This ratio is computed by simply dividing the total debts of the firm by

its net worth or total assets.

a. Total Debts/ Total Shareholders‟ Fund

b. Long Term Debts/ Total Shareholders‟ Fund

2. Liquidity Financial Ratios

These are used to judge a firm's ability to meet short term obligations, without disposing its long

term assets. The higher the ratio, the greater is the ability of the firm to pay its bills. The general

and frequent uses of these ratios are as follow:-

a. Current Ratio = Current Assets / Current liabilities

b. Acid-Test Ratio = Current assets less Inventories / Current liabilities

3. Operating Financial Ratios

Reflect the efficiency of the company‟s operations in utilizing its resources. These comprise of

Inventory Turnover; Accounts Receivable Turnover ; Accounts Payable Turnover (All three are

in terms of days) and Cash Conversion cycle etc.

4. Profitability In Relation To Sales Financial Ratios

33

These ratios tell us the profit of the firm relative to sales after deducting the cost of Cost of

Goods Sold. Here, it indicates the efficiency of operations. Generally, a firm with higher gross

profit margin will find it much easier to survive when it‟s operating environment change to its

disfavor comparative to those with razor-thin margins.

5. Profitability In Relation To Investment

The ratio relates to investments. One of these measures is the rate of return on common stock

equity. This ratio is computed by simply dividing the Net profit after taxes less Preferred stock

dividend by its net worth less Par value of preferred stock.

6. Coverage Ratios

These ratios are designed to relate the financial charges of a firm to its ability to service them.

One of the most traditional of the coverage ratios is the interest coverage ratio, which is the ratio

of earnings before interest and taxes for a particular period to the amount of interest charges for

the same period.

7. Solvency Financial Ratios

These financial ratios indicate the chances of a company going bankrupt. The main purpose of

this exercise is to ensure that a company is not in danger of going under anytime soon.

Note that the above yardsticks are frequently used as a ratio, or index, relating two pieces of

financial data to each other. You may compare a present ratio with past and expected future ratio

for the same company. By doing so, you can determine whether there is an improvement or

deterioration in the firm's financial condition and performance over time.

Through these ratios, you will have better understanding of the company‟s past performance,

management style and also it will explain the effects of change in each type of asset. It gives us a

clearer picture of how the company internal funding, fund allocation and financial performance

are working towards its mission. Overall, it will give us slightly better picture than if we were to

see them in their absolute figures- as to how they have managed their resources from time to

time. By comparing throughout a lengthy period, the ratios will give you a clearer indication of

their efficiency and effectiveness in their resources management; management style,

management strategies of taking advantage of the prevailing market situations. Through the

trends analysis, you may able to identify future opportunities and potential to a certain extent.

8. Price Earning (PE) Ratio

This ratio indicates a company's share price divided by the amount of profits it makes for each

share on an annual basis. PE ratios are normally calculated on the base of all the profit made in

the period and not the profits paid out to shareholders in that period.

34

P/E ratio or PER, is a company's share price divided by its earnings per share (EPS), expressed

as a number or as a multiple of EPS. The earnings used for the calculation can be either the

amount most recently reported by the company, or an analyst's projection of future earnings.

It is an important indication of comparative value especially for investors. The investors are

normally better off buying a stock with a low P/E ratio than one with a high ratio, as they are

getting more earnings for their money. It reflects how many times earnings investors are ready

to pay for a share. Assume that the share price is $5 and earnings per share is $1, investors are

ready to pay 5 times earnings.

However, in an efficient market, the share price should reflect a firm‟s future value creation

potential, greater value creation can indicate much greater future dividends from the company.

A higher P/E ratio should reflect greater expected future gains because of its perceived growth

opportunities and/or some competitive advantages, but at the same time it indicates that the share

price is relatively more expensive.

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CHAPTER 10. KEY PERFORMANCE INDICATORS

Key Performance Indicators, also known as KPI or Key Success Indicators (KSI), are used

significantly to present or identify a few critical factors that organizations should focus on to be

successful. This is because they serve as powerful and meaningful tools to define and measure

the progress of their pre-set goals. As such, the key impetus for using KPI was the notion that

factors which get measured are more likely to be achieved versus factors which are not

measured. Hence, I decided to bring it into the discussion, with the hope that you too will equip

yourself with this tool.

A) Definition

i) What Does Key Performance Indicators (KPI ) Mean?

A set of quantifiable measures that a company or industry uses to gauge or compare performance

in terms of meeting their strategic and operational goals. KPIs vary between companies and

industries, depending on their priorities or performance criteria.

ii) Investopedia explains Key Performance Indicators

A company must establish its Strategic and Operational goals and then choose the

KPIs which best reflect those goals.

For example, if a software company's goal is to be the fastest growing company in its industry,

its main performance indicator may be the measure of annual revenue growth. You may find

some KPIs in some annual reports. KPIs are often referred to as the Industrial Standards, in that

particular sector.

As usual, once an organization has formed its mission, identified all its stakeholders, and defined

its goals, a useful tool to measure its progress toward those goals is required. Thus Key

Performance Indicators come in to the picture, to play the role like measuring tapes.

B) Characteristics

The Key Performance Indicators selected must best reflect the organization's goals, they must be

key to its success, and they must be quantifiable (measurable). Key Performance Indicators

usually are long-term considerations.

Three main issues are discussed in more depth as below:-

a) Key Performance Indicators must be in quantifiable measurements.

An organization may have chosen the percentage of its income that comes from return customers

as KPI. A school may focus its Key Performance Indicators on graduation rates of its students.

b) Reflects The Organizational Goals

36

A company has one of its goals "to be the most profitable company in our industry" will have

Key Performance Indicators such as "Pre-tax Profit" and "Shareholder Equity" that measure

its profit.

Conversely, a school that is not concerned with making profits, will chose different Key

Performance Indicators. KPIs like "Graduation Rate" and "Success In Finding Employment After

Graduation", precisely reflect the school's mission and goal.

c) Must Be Quantifiable and Measurable

In order for it to function, Key Performance Indicator must be translated into meaningful ratios

or percentage or value, which accurately define its goal that can be quantifiable and measurable.

To illustrate further, examine a KPI such as "Be The Most Popular Company". You can see it is

not clear and very subjective because there you cannot measure a company's popularity or

compare it to others.

Another good example of a bad KPI is a general goal such as "Generate More Repeated

Customers". It is meaningless because it does not distinguish between new and repeat

customers.

Once the Key Performance Indicators are defined, it is good to use them constantly throughout

the years so that you can measure them over a longer period. To make it more meaningful, you

may consider whether to breakdown into KPI components. For example a KPI of "Increase

Sales", you need to consider whether to break down into units sold or dollar value of sales.

Further considerations, as append below, may need to be considered on Goods Returned or

discount

i) Whether it needs to be deducted from sales in the month of the sales or the month of the

returns?

ii) Whether sales need to be recorded at list price or at the actual sales price?

It is also a good practice to use your pre- set targets, as your benchmark, for each Key

Performance Indicator.

d) Must be Key To Organizational Success

KPIs must be selected from those Critical Factors that are essential to the organization reaching

its goals. It may be good to keep the number of KPIs small so as to keep everyone's attention

focused on achieving the same KPIs. KPIs should not be easily achievable.

It must be stressed that what is important here is that the KPIs must help the company meet its

overall objective.

C. PURPOSES

37

KPIs serve as vital navigation tools used by managers and leaders to determine whether they are

on course to be successful in that particular industry. The right set of developed KPIs will shine

light on performance and enhance attention on those areas that need immediate attention. This is

similar to a doctor who takes measures such as heart rate, cholesterol levels, blood pressure and

blood tests to determine the health of their patients. To be effective, they need to be closely

linked to the strategic directions and objectives of the organization.

KPIs will give you a sound and solid base of knowledge if it is uniquely developed and fit well

to the particular industry, namely dispatch reliability and load factors for an aviation industry.

The issue is that most companies collect, compile and report a vast amount of everything that is

easily measured. As a consequence their managers ended up drowned in irrelevant information

while thirsting for insightful information. Cautious care and concerns need to be taken seriously

and consciously.

By deeply understanding its usefulness, purpose and functions, meaningful actions will be

pursued to achieve the Big picture of the business.

38

CHAPTER 11. True Organization Change Management Starts in the Brain

Fig 16 Beliefs

According to Erika Garms, “In the brain, change is associated with error detection, threats and

fear.” Garms further advocates that “merely receiving advice or information can be registered in

the mind as change and elicits the same threat response. That is why organizational management

is so difficult yet managing it is so important. Therefore, to help create smooth organizational

changes and reduce anxiety and stress, managing disagreed perceptions in the brain is crucial.

How many of you agree to the title of this chapter? I do. Just like human beings, the brain of the

organization is represented by the key management. Coping with change and progress is more

inclined to be an inside job of an individual. Thus, we need to assess the qualitative aspect of its

Leadership as to how good and effective is its leadership to influence, persuade and convince the

employees.

Key management is mainly responsible to nurture and navigate the direction of the company.

They need to adopt the appropriate approach that can enhance their organization improvement

process and ultimately evolves in the face of continual change. Organizational empowerment

must begin in the mindset of the leader who initiates change in the organization.

However, most traditional companies have an established centralized bureaucracy with a strong

management team as opposed to leadership mindset. Naturally, those leaders who have know-

how that can enhance empowerment of his people are more capable in leading their

organization's evolution through a series of incremental changes. This is because they tend to

have the personal ability to shape the culture, climate and character of their units through their

personal vision, results and good corporate culture. Leaders that possess the highly demanded 3

I‟s, as stated below can meet the needs and demands of both internal and external customers.

a) Ideas

Leaders need to constantly encourage and stimulate creative thinking within their organizational

units to develop new ideas and concepts to improve team outcomes. This healthy process is

required to harness the "native knowledge" of individual employees to increase the productivity

and performance of the organizational as a whole. Leaders nowadays are looking for the things

that are working and seeking ways to expand their use through increased testing and

experimentation.

Leaders are also required to continually look for new ideas to empower individual employees to

make critical decisions that reduce inefficiency and frustration at key points positively impacting

the organization's output or product. Empowerment streamlines and makes the entire

organization more effective and efficient because they can make them "on the fly" to quickly

resolve a problem. This allows the organization to move quickly forward, free of needless

barriers.

39

b) Innovation

In addition to empowerment, leaders also focused their organization‟s members on improving

personal initiative and innovation as opposed to simply improving individual employee

compliance and conformance to organizational goals and objectives. With a conducive

environment, it is very much easier to involve the frontline employees to produce higher-quality

outcome in a more efficient and profitable manner. To enhance innovation, leaders are required

to maintain a perspective that treats employees as human resources with something positive to

contribute to the organization; not just as a worker in line with higher recognition of their

personal abilities, insight and intelligence. Thus employees are capable and motivated to meet

the challenges presented to them. This advances and improves the overall organization.

Leaders need to be more proactive rather than reactive. By actively seeking ways to make things

happen, their dynamic interaction will create a sense of excitement that is highly contagious to

other members of the organization. This produces positive attitudes and motivation throughout

the organization.

c) Involvement

Leaders are always seeking new ways to motivate and stimulate the active involvement of all

employees in producing a better product or outcome. Active involvement will enhance the

employee's ownership and accountability by flattening the decision making process. This results

in a better decision making process. Leaders are thus able to focus their attention on the

collective results and outcomes produced through involvement of the workgroups and teams

within their organization. The use and application of effective leadership and motivational

methods allows leaders to build and foster strong organizational cohesiveness. The outcome will

be an increased empowerment, overall better accountability and effectiveness.

Leaders also need to be more dynamic in instilling better climate, culture and character for

continuous success of the organization. Most will discover that the climate they create and shape

will assume the characteristics they personally display. Their personal example and proactive

approach will have positive impact to their employees. Once their employees are empowered

within the organization, their leadership characteristics emerge and are developed.

Instead of restricting limit on their capabilities, leaders cultivate and nurture these individuals

until their potential is realized. This is a tremendous responsibility for the individual leader to

assume, but a necessity for the organization to grow and evolve in the face of continuous change.

To thrive on tough competition, leaders need to drive their organization forward by eliminating

waste and inefficiency and focus the organization on producing higher-quality products or

outcome that can compete more effectively in the marketplace.

This does not stop at the very top but spread to every level. Every leader will then assume the

responsibilities of influencing the attitudes, activities and actions of their employees. This is

40

opposed to the traditional role of managers or supervisors who see their role as simply directing

the employees under them.

In the capacity of an influencer, the leader constantly applies the sound principles of effective

leadership to shape his organization. This places an emphasis on results over processes. In other

words, the final desired result is concentrated on and not necessarily the process that produces

the result. Within the empowered organization, the process can be radically changed by the

involvement of frontline employees to produce higher-quality outcomes in a more efficient and

profitable manner.

“The possession of everything begins in the mind.” Bruce Lee

In conclusion, I have found that goals are good for planning your progress and systems are good

for actually making progress.

41

CHAPTER 12. QUALITATIVE ASSESMENT

There are two aspects of the organization which form the internal part of the organization as

follow:-

1. QUANTITATIVE ASPECTS

Substantial quantitative aspect and its financial tools have been discussed in depth. To complete

and ensure optimum achievement, qualitative aspects need to be emphasized not only to

complete the whole discussion, but also to be in line with the big picture of the business.

2. QUALITATIVE ASPECTS

Here, it is strongly recommended to look at the key management profile, qualification and track

records. More importantly, is their individual integrity, core values and character which have

been put into real practice. This information can be obtained through business intelligence you

have gathered and from other industry's players.

a) Needs Assessment

From the ratios analysis and feedback from your researches, you may be able to identify their

exact organization key needs and how they addressed them. The effectiveness and quality of

their leadership may give good indication of their success rate in dealing with their needs. This

can be ascertained through their commitment in term of bringing human resources, financial and

other priorities in their action plan.

b) Gap Analysis

To ascertain accurately, you need to check whether they have the system in place to measure,

monitor and manage what they should do and what they actually do. If yes, do they respond in a

timely basis? How frequent they monitor and do they allocate adequate resources in this area of

improvement?

c) Culture Assessment

You may ascertain through interview and follow up with observation as to what are the value and

culture that had been put into practice in the organization. Next, you may ask, what are core

values, really? Well they are the deeply ingrained principles and practices that can never, ever,

be compromised. This normally makes the organization distinct and so must always be

maintained. Extra caution need to be exercised in determining the existence of Aspiration value

(i.e. the value that will help the company to succeed in the future) but may dilute its core value at

the same time, for e.g. transparency.

d) How they translate their thinking into action?

42

In maintaining a culture of continuous improvement, the process of measuring, motivating and

communicating must be in place. This will ensure that the leadership team can translate their

thinking into action.

Furthermore Strengths, Weaknesses, Opportunities and Threats analysis may shed some light as

to both the internal strengths and weaknesses and the external opportunities and threats. External

factors normally refer to those factors that are beyond or outside control of the organization.

With this, the leadership team may draw up and apply the appropriate strategy that best suit its

strength and opportunities they have identified at that particular time while reducing the threats

by appropriate response.

“Successful people make right decisions early and manage those decisions daily.” John

Maxwell. But decision managing is highly underrated. We think that our decisions will

automatically stay good, but they won‟t especially when situations in your life go bad?

43

CHAPTER 13. CONTINUOUS IMPROVEMENT PROCESS IS AN ESSENCE OF THE

BUSINESS

“The secret of Change is to focus all of your energy, not fighting the old, but on building the

new.” Socrates

What is a Business Model?

A business model describes the rationale of how an organization creates, delivers, and captures

value in term of economic, social, cultural, or other forms of value. The process of business

model construction is part of business strategy.

In theory and practice, the term business model is used for a broad range of informal and formal

descriptions to represent core aspects of a business, including purpose, target customers,

offerings, strategies, infrastructure, organizational structures, trading practices, and operational

processes and policies. The literature has provided very diverse interpretations and definitions of

a business model. A systematic review and analysis of manager responses to a survey defines

business models as the design of organizational structures to enact a commercial opportunity.

Further extensions to this design logic emphasize the use of narrative or coherence in business

model descriptions as mechanisms by which entrepreneurs create extraordinarily successful

growth firms.

"Whenever a business is established, it either explicitly or implicitly employs a particular

business model that describes the architecture of the value creation, delivery, and capture

mechanisms employed by the business enterprise. The essence of a business model is that it

defines the manner by which the business enterprise delivers value to customers, entices

customers to pay for value, and converts those payments to profit: it thus reflects management‟s

hypothesis about what customers want, how they want it, and how an enterprise can organize to

best meet those needs, get paid for doing so, and make a profit."

Business models are used to describe and classify businesses (especially in an entrepreneurial

setting), but they are also used by managers inside companies to explore possibilities for future

development. Also, well known business models operate as recipes for creative

managers. Business models are also referred to in some instances within the context of

accounting for purposes of public reporting.

Wilkipedia.

The above explanation well illustrated the point that Process is an essence of business apart from

time, which is the rare commodity on earth.

Generally, consumers expect the turnaround time between order and delivery to be as short as

practicable. As such, companies that focus on shortening the order-to-invoice period are in a

much better position to meet consumers' satisfaction and gratification.

44

In a rapidly changing business environment, customers have grown used to ordering online and

receiving a product soonest possible. In order to meet their expectations, merchants need to

shorten the time between order and delivery.

In order to stay competitive in business, every business needs to take advantage of every

opportunity to contain or reduce its costs. Decreasing the order-to-cash cycle is crucial so as to

preserve margins and profitability. Similarly, this issue will be even more crucial especially for

industry players who have very thin margins. Bear in mind that high margin will attract more

new players to come into the industry and eventually will erode the margin.

“To me, the extraordinary aspect of martial arts lies in its simplicity. The easy way is also the

right way, and martial art is nothing at all special; the closer to the true way of martial arts, the

less wastage of expression there is.” Bruce Lee

Below are several continuous improvement processes, with explanation and illustration as to

how you will be benefiting abundantly if they have been implemented successfully:-

I) Process of Shortening of The Cash Cycle

The cash cycle comprises of three components: Accounts Receivable, Inventory and Accounts

Payable. The first two components, which are out-of-pocket, tend to lengthen the cash cycle

because this cash is out to fund your inventory and sales. On the other hand, the third component

often shortens the cash cycle, if it is not in cash terms. Therefore, to measure the components of

the cash cycle, you need to compute the above three components in terms of days such as Days

Receivable, Days Inventory and Days Payable. The Cash Cycle equation will be as follows:

Cash Conversion Cycle Equation = Days Receivable + Days Inventory - Days Payable The questions to shorten cash cycle become relevant and imminent in any and every industry.

i. Accounts Receivable

Express in term of Days Receivable, period taken for your customers to pay for products or

services. The Days Receivable ratio is very much dependent upon your credit policy. However,

you may allow your customers fewer days than your credit period to pay their bills and your

Days Receivable. Hence you are doing an acceptable job of collecting cash from your customers

in fewer days than your credit period.

ii. Inventory

Similarly, inventory is also calculated and expressed in term of Days Inventory. This is the

period it takes for inventory to be produced and sold. Generally, your Days Inventory will be

very much dependent upon the nature of business and industry you are in. It is obvious that the

fewer days you hold inventory the better it is. Both ratios will benefit the cash cycle. For service

companies without inventory, parts, or other merchandise, Days Inventory will be zero. That‟s

why lots of manufacturers practice just in time concept for their components or parts and

materials.

45

To achieve best-in-class performance, the following actions may be pursued:

a) Real-time status of order, delivery and billing information;

b) Standardize and automate procedures for order process such as order management,

fulfillment and delivery, credit and billing management;

c) Employ work-flow automation for major and critical process steps; and

d) Implement build-to-order.

The above will enable shortening of the order-to-cash cycle. The enterprise resource planning

(ERP) involves full integration of order entry, procurement, production and resource planning

and execution as well as financial management; work-flow automation; event management

(triggers and alerts); electronic interfaces to banks and customers; Web-based and electronic

sales order management application; credit management solution; and an electronic invoice and

payment solutions offers the ideal solution.

iii. Accounts Payable

It is also expressed in term of Days Payable, which is the period for you to pay your bills to

suppliers who may have allowed you credit terms. These vendors are likely supplying materials

or services that you use in offering your products or services. Therefore, Days Payable ratio will

also reflect your payment policy. The relationship with supply chain members and the tools used

to communicate quickly and accurately play a significant role in minimizing the order-to-cash

cycle.

From the above discussion, to improve or reduce cash conversion cycle, you need to know what

to do, install the tools to do it and train your employees to use those new tools so as to ensure

you reap its objective. By implementing it successfully, you will be well rewarded.

II) PROCESS OF EFFECTIVE HIRING

People and their relationships in any organization are valuable assets which are not reflected in

the financial statements and cannot be taken lightly. Bear in mind, the organization basically

comprises of its people resources, cultures and values they brought in.

What would you foresee if the companies focused more on hiring right the first time? Evidence

points to the fact that companies who hire well have more engaged staff, they are more

profitable.

Think again what if you reallocate your focus to spend 80% of your resources effectively hiring

people, and 20% of your resources managing them? To achieve this desired result, you need to

have clear objectives as follow:-

a) Define success in the role

46

What we need to look for are basically the top 5 key accountabilities for the role and the

underlying attributes that candidates must possess in order to discharge his roles and duties

effectively and efficiently. Key accountabilities must be specific and measureable outcomes

required for success in a given role.

b) Identify competencies in candidates

Once the measureable, specific and quantifiable outcomes are determined you should have a

clearer idea what competencies are required from the candidate. What matter most here are their

competencies and attitudes, not skills? Skills can be taught, but not their attitudes.

c) Measure for role, organizational and fit

“Fit” refers to a values-based measurement which determines whether their values are align with

the company, team, and boss.

d) Genuine Engagement

Here, it primarily refers to Compliance to Commitment, Mark Herbert. You need to have

happy employees who are truly committed when you create a culture of respect, responsibility

and rewards. Conducive environment is inevitably encouraged.

By focusing your efforts more effectively on the people equation, you can enhance performance

and productivity that can eliminate 80% of your problems.

COST-BENEFIT ANALYSIS TOOL

Fig 17

To determine its viability of the process, Cost-benefit analysis (CBA) may be employed. It is a

technique used to compare the total costs of a project with its benefits. This enables the

calculation of the net cost or benefit associated with the project.

This technique is frequently used at the start of a project when different options or courses of

action are being appraised and compared for choosing the best approach. It can also be used to

either evaluate the overall impact of a project in both quantifiable and qualitative manners.

CBA adds up the total costs of a project and compares it against its total benefits. The technique

assumes that a monetary value can be placed on all the costs and benefits of a project, including

tangible and intangible returns to the organizations and impacts. As such, a major advantage of

cost-benefit analysis lies in forcing people to explicitly and systematically consider the various

factors which should influence strategic choices.

Decisions are made through CBA by comparing the net present value (NPV) of the project‟s

costs with the net present value of its benefits. Option is taken based on whether there is a net

benefit or cost to the approach, i.e. total benefits less total costs. Costs and benefits that occur in

the future have less weight attached to them in a cost-benefit analysis. To account for this, it is

47

necessary to „discount‟ the value of future costs or benefits to place them on a par with costs and

benefits incurred today. The „discount rate‟ used will generally be the prevailing interest rate.

The sum of the discounted benefits of an option minus the sum of the discounted costs, all

discounted to the same base date, is the „net present value‟ of the option.

48

CHAPTER 14. ESSENTIAL SKILLS FOR LOOKING BEYOND

“Nothing ever goes away until it teaches us what we need to know.” Pema Chordon.

Do you agree that having top-notch mathematical skills and financial knowledge is only the tip

of the iceberg especially when you need to look beyond financial statements?

Willingness to stay open minded and Being open to all possibilities is the way to excel. In doing

so, you will then stay hungry, vigilant and curious to investigate further, and not accept things at

its face or absolute value, but subject them to further scrutiny.

Apart from sound and broad knowledge, you need to stay calm and listen patiently to details so

that you are able to pick out those pertinent and critical areas that need to be addressed.

“Those who are skilled in combat do not become angered; those who are skilled at winning do

not become afraid. Thus the wise win before the fight, while the ignorant fight to win.” O Sensi

Ueshiba.

Are you ready to equip yourself with all these skills?

You will, no doubt, recognise whether you have these skills or not as we go along.

1. SOUND PROBLEM SOLVING SKILLS.

Fig 18

Author and speaker Grenville Kleiser stated, “To every problem there is already a solution

whether you know what it is or not.”

Here, it does not necessarily mean that you must have great problem solving skills, but be

someone who has the Positive attitude working towards solving the problem at hand. Being able

to solve them rather than cracking under pressure is essential. However, if you are someone who

reacts quite negatively by either procrastinating or avoid dealing with problems, you will need to

do something to meet the challenge.

So, always be prepared to confront and conquer the change, once and for all, whenever it

surfaces. Otherwise it may be stressful, imagine that you are trying to either pretend that it is not

in existence or deliberately ignoring it… but you know it is still there! I hope you know what I

mean here.

Similarly change and progress, at times, create problems. Imagine when we are working

smoothly and something changes, either due to internal or external changes, we may have a

problem especially when we don't response to this change, timely, adequately and appropriately.

This problem, in fact, is the signal to us that something has changed.

49

In life, we are subject to Changes one way or the other, so it is critically important that we are

adequately equipped with problem solving skills. It is best that we deal with problems as soon as

it arises. Alternatively, cultivate and nurture to have a positive attitude towards problems solving

and treat it as a challenge as I normally do. Problems are opportunities for us to learn how to do

things more effectively and efficiently. In short, we need to recognise, deal with the problems,

and move on.

With this skill, you are able to realise the environment had changed; you can create a new belief

or habit, based on what was needed at that particular time. Hence, you are able to see the links

and make them work out solutions that are more relevant and significant to the new environment.

I am fortunate to have excellent problem solving skills mainly through my diverse background

such as having a passion in Mathematics, extensive training in Chess game during my early life

and my application of this skill to my professional life. Hence, it moulds me to have fast thinking

skills and become a good problem fixer. For example, I have proposed to adopt the accounting

policy of International Accounting Standards 17 which enabled the company I worked for

to book in additional profits of slightly RM 2 million before it went for rights issues. I also

provided a solution to circumvent the Section 132 (g) of the Company Act for the group

restructuring exercise. I enjoy taking such challenge and am a good problem fixer.

Throughout your personal and professional life, you should be positive and welcome problems if

you truly want to make progress. Every crisis has its own opportunity. This is the way to enhance

your confidence and your capability.

2. VERSATILITY

Fig 19

“Notice that the stiffest tree is most easily cracked, while bamboo or willow survives by bending

with the wind.” Bruce Lee.

This skill is very closely linked to the first. Here, we are talking about the degree of comfort you

have in operating in an unstructured, unpredictable and unthinkable environment. Ask yourself

honestly whether you expect things to change, or you expect things go back to normal?

Being more versatile, you can easily align your perception in line with the changes if you want

to. Then you are able to start thinking about what the opportunities are as a result of this change.

If the opportunities are not obvious initially, you then need to think about what you can learn and

earn as a result of this change.

Due to my possession of the above first skill, I always think of more effective and efficient

means in order for me to cope well with my studies while I was engaged with other part time

jobs. One strategy is to follow my body clock rather than the real clock and the circumstances of

the environment. An example is that I had to schedule my mathematics exercise to be done

50

during noisy hours and studied other subjects in quieter time so that I can pay undivided attention

to it.

Due to my nature of disliking routine tasks, I need to be more creative and innovative to do

something beyond my capabilities.

It also explains why I spent short span of my profession in the companies I had worked for, with

exception for the aviation company where I worked closely with the founder in growing the

private limited company into a publicly listed company on Kuala Lumpur Stock Exchange in

1997 and turn around the company which was seriously affected by the Asean Financial Crisis

thereafter.

3. SOUND COMMUNICATION SKILLS

Fig 20

It will allows you to share your thoughts, ideas and feelings with others apart from being good in

crunching numbers - we must be able to communicate our knowledge with compelling speaking,

writing and presentation skills.

Just imagine how you are going to convey complex information to people who may comprises of

a board, investors or prospects, in such a way that even the lay person can easily understand what

you are talking about without using financial jargon.

To make it effective, you need to go straight to the point as people do not have time to listen to

less important issues especially those from high income group as their time is very precious to

them. You may craft it in a very catchy, captive and creative manner so as to capture their

immediate attention.

Your reasoning must be compelling and convincing to arrest their minds and hearts. This is to

ensure that they believe what you said and your solution is the best feasible in terms of their

interests and not yours.

4. SHARP ANALYTICAL SKILLS

Fig 21

Analytical skill is the ability to visualize, articulate, and solve both complex and uncomplicated

problems and concepts and make decisions that are sensible based on available information.

Such skills include demonstration of the ability to apply logical thinking to gathering and

analyzing information, designing and testing solutions to problems, and formulating plans.

Usually standardized tests through financial tools, observations and interviews include an

analytical section that requires the examiner to use their logic to pick apart a problem and come

up with a solution.

Although there is no question that analytical skills are essential, other skills are equally required.

For instance in systems analysis the systems analyst should focus on four sets of analytical

51

skills: systems thinking, organizational knowledge, problem identification, and problem

analyzing and solving. It also can describe the way we identify a problem and subsequently work

out the solutions.

In 1999, Richards J. Heuer Jr., explained that: “Thinking analytically is a skill like carpentry

or driving a car. It can be taught, it can be learned, and it can improve with practice. But like

many other skills, such as riding a bike, it is not learned by sitting in a classroom and being told

how to do it. Analysts learn by doing.”

5. PRE-ACTIVE ANTICIPATION

Fig 22

To draw up an effective strategy, you need to predict what is most likely to happen based on

those findings or trends analysis you have gathered from various reliable sources. Rather than

being proactive, I agree with Daniel Burrus that we to be pre-active. In other words, anticipate

what tomorrow‟s problems will be if we still persist in solving the issue the same way we did.

Always think about how you are going to solve those future problems apart from today‟s

problems. To stay ahead is not to act as fire fighters all the time.

6. CLOSENESS

Fig 23

Closeness in term of people skills requires you to truly understand their personality, to listen and

ask the right questions, resolve conflicts, educate and counsel others. So, psychological aspects

are far more important than technical knowledge. It does not mean intimate relationships, but

rather someone who truly likes loves and cares about you as a person and whom you feel

comfortable talking to about problems when they arise. What this group of people often needs,

therefore, is an unbiased advisor who can understand their needs and help them to resolve their

financial issues.

Trust it does not seem so hard to you by now. These six simple skills can empower you to be a

significant difference maker.

With the above discussion, you are able to recognise and realise that it is not really hard. What

we require is conscious efforts; otherwise we will slip back into old habits.

So, to cope well with Change,

You have to make a Conscious Choice,

to take a Chance.

Otherwise, you will never cope with Change you long for.

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CHAPTER 15. CONSISTENCY PAYS OFF HUGE AND HANDSOME DIVIDENDS

Sow an action and gain a habit;

Sow a habit to gain a character;

Sow a character and gain a destiny. William James

What does “consistency” mean?

Consistency means an expected predictable outcome/effect that will be produced from one time

to another. Consistency will free our minds of worries on what might have happened and

demands us to be accountable to our own actions. Therefore, we constantly need to align,

balance and strategize to obtain our pre-set outputs. There is no magic to it, so to speak.

How do we apply consistency in this context?

The financial statements generally serve as a good reflection of the past performance of any

organization. They accounted for their accumulated past actions and events that have taken

place. No doubts, past performance cannot guarantee future performance as the future is very

difficult to predict.

However, consistency may somehow increase our chances of prediction of the future results with

more accuracy with certain basic and realistic assumptions.

You don't have to be an expert to figure out that consistency is an essential ingredient to

successfully change and grow your organization, in terms of its sustainable business growth and

profitability as what is highly demanded by today's business world. By closely scrutinizing the

financial statements, these clues, signs and indications may be found and leads you to gauge

what are the likely consequences you are going to get from this key management team. For

instance if those critical challenges are not properly addressed, then these signs will eventually

turn into a crisis that may eventually drained out their resources. One good example is the

dramatic increase of its trade receivables out of proportion to the increment of its sales

comparatively to that particular industry. As times goes by, this issue will snowball and be

reflected in the subsequent years of its financial statements.

Management has to primarily discharge their duties and responsibilities in the best interest of

their company strategically and operationally with full accountability towards its goals. Hence,

they need to deliver the expected results to their stakeholders. Clarity of the purpose will demand

them to be consistent in their thoughts and actions. As such, they consistently need to shorten

their businesses' processes; better utilized their people both internally and externally; align with

their sound policies and solid principles in enhancing effectiveness and efficiency in their

business. This is called the consistency exercises. The key to such an exercise is to keep the task

simple and basic, and do it consistently. At times, they might even have to revisit or revamp and

take appropriate pro-active action to be more creative and innovative to build long lasting

competitive edge.

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Although the consistency exercise is deceptively simple in its design, it is not easy to

accomplish. Doing things daily in working towards their pre-set goals requires long lasting

burning desire. Key Management needs to have the passion and will power to create such a habit

and spirit that really helps to build momentum. To enhance its effectiveness, imagine all the

things we might accomplish and keep working perpetually till its full completion. Magically

speaking, we need about 30 days of consistency to gather enough force to manifest such a

desired outcome. You may wonder what does gathering force mean, and why would we need to

gather force to succeed in business? Force, in this context, is the energy, effort and enthusiasm

that we use to transform an idea or concept into a physical manifestation - something we can

touch, feel and hold. The more force we have, the more outcomes we can manifest.

We need to consider carefully what values the company is creating? How are they going to make

things happen to fulfill their mission statement? Constantly find out what exactly is their

knowing doing tools gap strategy employed to materialize their goals. What are their hidden

potentials, opportunities they have and are their disseminated business activities consistent with

their story line, their future plans and what are the incentives for them to push boundaries beyond

their limits?

How are they prepared to face the greater challenges both internally and externally? How

versatile are they in aligning with those challenges to stay ahead? These may be reflected in their

capital commitments, company's culture or trade campaign or exhibition they are involved and

the projections they have circulated from time to time. How they align each department to work

in harmony towards the company ultimate goals? How transparent are they?

All the above requires a great deal of patience and determination to work consistently to

materialize its goal. However, observing how the company developed into secure, responsible,

and consistently changing and growing is well worth it!

How many of you agree that Consistency is one of the keys to success? I do. Consistency is

important because it makes a situation run smoothly. Consistent means to flow continuously as if

something flows in sync, everything runs correctly.

Seeing far, or having a strong vision, is a strong asset - but we have to remember that seeing and

doing are two different things. In the same context, any company can come out with well written

mission and vision statement. Doing and achieving it is another thing all together.

In this context, Management needs to generate consistently high profits, strong cash flow and not

just pay high dividends to make it appealing to investors, lenders and suppliers. By consistently

generating high yields and growth, the company can fetch a higher price for its worth.

To ensure sustainable growth, the company has to thrive for not only exceptional excellence, but

far beyond. It has to manage both its internal and external resources to deliver results that far

exceed the customers' expectation and satisfaction. To achieve such results, it needs to deliver an

exceptionally excellent solution to solve its customers' problem. This required expectation will

slowly and surely become part of the company. Better outcome can be achieved with consistent

efforts.

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Why consistency is so important?

This is because:-

a) Consistency gives us a sense of security, comfort and trust that our needs will be met. This

helps in the bonding process among its stakeholders.

b) Stakeholders with consistent key management experience less anxiety.

c) Developing more frequent informing, reporting and updating will cultivate a more peaceful

and harmonious life among its stakeholders.

d) Consistency helps key management develop a sense of responsibility and accountability to

deliver the expected duties sincerely because they know exactly what their interested parties

expect from them.

e) Investing early in consistent managing and monitoring skills will pays off huge and handsome

dividends later. You will earn respect and recognition from your stakeholders. Thus, this will

strengthen your relationship with your stakeholders to propel and prosper your business further.

I would like to sum up with the following quotation:-

"I've learned from experience that if you work harder at it, and apply energy and time to it, and

more consistency, you get a better result. It comes from the work." - Louise C. K.

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CHAPER 16.THE MAGIC TOUCH

Fig 24

“The great leaders are like the best conductors – they reach beyond the notes to reach the magic

in the players.” Blaine Lee.

The Magic Touch

What is the magic touch in this context of looking beyond financial statements? Of course this

refers to the leadership team that effectively draws up and applies the operational and strategic

plans that deliver exceptional optimized results of the company that meet the expectation of its

stakeholders.

The qualitative aspect of the leadership team needs to be assessed to ascertain its effectiveness,

quality, leadership skills, mindsets and characters. This can be seen from the wisdom and know

how the team applies throughout the organization. The organization is well reflected in the

practices of their chosen wisdom, culture and value, so to speak. Similarly, the evaluator needs to

have the wisdom of knowing the difference between what the team can change and what it

cannot change. It is worthwhile to know which organization spends too much energy, time and

efforts in futile attempts to change what it cannot change. Thus this may cause frustration and

other form of anger among its employees and external parties.

Fig 25

The differences between what can be change and what cannot be change

“If you don‟t like something, change it. If you can‟t change it, change your attitude. Don‟t

complain.” Maya Angelou.

Knowing the difference of what can be changed is the first step of accepting the wisdom. By

then, full energy will then be directed in building the new, rather than fighting the old habits,

exactly advocated by Socrates as follow:-

"The secret of change is to focus all of your energy, not fighting the old, but on building the

new."

However, the team may implement other measures / processes so as to instill a better climate,

culture and characters of the organization through 5 Cs (Conditioning, Commitment,

Consistency, Consciousness and Courage) to enhance its chances of continual changes and

progress. Change is unavoidable, but progress is optional.

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Empowerment Mindset

Fig 26

Sales trainer Brian Azar says, “Sales are not made or unmade inside the prospect‟s office. They

are made or unmade inside you.”

To enhance the achievement of such desired outcome, 5 Ps empowerments (i.e. Persistence,

Passion, Perspective, Perseverance and Practice) will also apply in order to attain this magic

touch.

Concentration

The Law of concentration states that whatever you dwell upon grows. The more you think about

something, the more it becomes part of your reality.” Brian Tracy

Concentration is the ability to keep your awareness on one thing for a prolong period of time.

The more you practice concentration, the better you get at it. The power of observation is a

natural byproduct of the ability to concentrate. With the power of concentration, you will direct

all your focus on what matter most to you until you achieve it. By constantly practicing, you will

gain your strength in one particular thing until it happens. Thus, it will serve as an additional fuel

to your desire. By then, you will be empowered to turn everything in your favor.

Leverage

You can also leverage on resources, ideas, capital and expertise you don‟t have to make

whatever you want happens. By doing so, the company increases its leverage because it can

invest in business operations without its equity. Most companies use debt to finance operations

that is to expand its business by leveraging on capital it does not have. Thus doing something

impossible yet feasible.

Clarity of Your Goal

Clarity of your goal will also add fuel to your desire. The clearer the better because it will give

you more power. Therefore, you need to constantly exercise to manifest your goal until it is

crystal clear in your mind that you are absolutely certain that this is what you want before you

will make it happen.

What cannot change?

“We can‟t change the inevitable. The only thing we can do is play on the one string we have, and

that is our attitude…..I am convinced that life is 10% what happens to me and 90% how I react

to it. And so it is with you… {We} are in charge of our attitudes. Pastor, Prof and author

Chuk Swindoll.

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On the other hand, some external factors that affect business namely external competition, social

changes, legal restrictions or policies, technology, taxation issues and political influences cannot

be changed. In addition, a business can be affected by changing trends, sabotage and religious

factors.

To minimize the external impact, it is worthy to note the nature of its business, capital outlay and

regulatory framework. One excellent example is an aviation company which involved huge

capital outlay, highly regulatory regime and is in a high risk industry. Just imagine the

September 11, 2001 incident which had huge repercussions for major airlines and many of which

saw their business fall away.

Having said so, the leadership team still has a choice as to how they want to respond to those

changes that are outside their control. By knowing the resources and strength of the organization,

they will then make best use of the situation to tap whatever opportunities which are available to

the company at that pertinent time. Leadership team will then not only focus on strategic

thinking, but also on translating that thinking into action that ultimately bring results to the

company. For instance, United Airlines, one of the world‟s largest airlines, has responded

flexibly to severe challenges within its external environment. It was then able to meet its

customers‟ needs by making its existing assets more productive, trimming its costs and

marketing mix as a strategic tool in response to the unforeseen external adverse event.

Knowing Doing Gap strategies

Have you ever wondered why are there so many gaps between what companies know they

should do and what they actually do? Why do so many companies fail to implement the

experience and insight they've worked so hard to acquire? It is not necessary that the FIRST or

the Fastest to reach the destination is a Champion. YES! The fastest you run might lead you to

the winning stage and this might be a temporary situation, somehow. Nevertheless, if you are

persistent and never stop running, you would definitely embrace the success in a longer term.

Ultimately, you don't fight for the FIRST place but to build the success ladders step by step,

slowly but steadily.

To access to this magic power, you need to look for more than knowledge and numbers. In other

word, you are looking for wisdom and interpretation.

By adopting and applying this strategy effectively, it will further enhance the chances of success.

In short, you will reap the miracle benefits if you know or have applied knowledge of the magic

touch. With consistent and persistent practice, you will enhance your magic touch power

especially you have been well equipped with those relevant know how, skill and mindset which

we have discussed much earlier.

“Magic is believing in yourself, if you can do that, you can make anything happen.‟ Johann

Wolfgang van Goethe.

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CHAPTER 17. CONCLUSION

“Only those who will risk going too far can possibly find out how far one can go.” T.S. Eliot.

It is very obvious that just using the financial statements are definitely not enough as the sole

determining factor of the future performance of the company. As such, we need to look far

beyond the financial statements. Financial literacy is not business acumen. Business acumen is

the understanding of the real meaning behind the numbers as they are the result of the big picture

from the decisions and strategies taken.

Scrutinizing the financial statements will give you a scope on the quantitative aspects of the

company. We will still look at the qualitative aspects as it plays equal or much higher significant

role in the success of the company. Strong and sound qualitative aspect of the organization in

term of its leadership, culture and mission, may not be able to guarantee its long term success,

but the chances are much higher comparative with those with poorer quantitative aspect.

This is because what we have assessed so far is restricted to the internal part of the company. No

company operates in a vacuum. Therefore, other critical important issues in regards to its

external environment where it operates are also equally important. The external threats to the

industry may be very significant such as technological changes may result in the company losing

its market share or even be phased out. On good example is hard copy printed materials.

In the above mentioned cases, it can be argued that if the company has qualitative leadership,

then the chances of revamping / transformation its entire business in order to stay relevant and

competitive, prior to those changes is definitely much higher than those companies with poor

qualitative aspect. Therefore, it is pertinent and relevant to assess how versatile the company you

are evaluating in term of its structure, culture and mindset in response to those changes arising

from technological advancement, legislation and political changes. No doubts, no one can

control the external forces, however there is always a choice for the company to choose how they

are going to respond to those changes. In this sense, being more pro-active in getting prepared in

advance is a much better choice apart from continuous improvement processes.

With the rapid changes in today's business world, there are certainly more uncertainties or

challenges the company is going to face. To cope well with these changes, leaders should not

sideline these main issues, instead they should be more bold in confronting and conquering these

challenges with better preparation and being equipped with the applied knowledge, mindset and

skills.

“You have to take risks. We will only understand the miracle of life fully when we allow the

unexpected to happen.” Paulo Coelho.

Good quality leadership is vitally important to cultivate the required climate, culture and

characters to meet the needs and demands of its customers, both internal and external. To meet

that everlasting changing demands and needs, the company is also required to develop the three 3

Is (Ideas, Innovation and Involvement) which we have discussed much earlier.

59

Therefore, it is always worthwhile to note that:-

When your mind is weak, you see problem.

When your mind is balance, you see challenge.

When your mind is strong, you see opportunity.

Musician Bruce Springsteen says, “A time comes when you need to stop waiting for the man

you want to become and start beginning the man you want to be.” You need to feed your mind

and soul to become the person you desire to be.

Seeing the big picture without losing sight of the details is crucial. Once you reached that state of

mind, you are able to thrive even with the uncertainties and complexities. You are also able to

consistently make game-changing decisions that deliver results. Therefore, business acumen is

an essential characteristic that no business leader can afford not to have. A sense of purpose also

helps in adverse conditions. This is because it helps you to realize what matter most.

The good news is that the more seasoned the leader is, the more he will be able to face such

challenges. He will also be able to turn the adversity into opportunity, provided he has a much

stronger mindset and be able to stay focus on objectives and big picture of the business instead of

obstacles. In short, it is more accurate to say that only the person who can see the invisible can

do the impossible. To see the invisible, you need to practice 95% on mind and 5% on eyes. This

is the miracle of looking beyond the financial statements.

Lastly obey the principles without being bound by them. Bruce Lee.

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SPECIAL THANKS

First, let me congratulate you for making the decision to invest in this financial insightful

transformational book. The efforts you make in reading the book is a clear indication of your

seriousness and commitment in improving your knowledge, mindset and skills. Trust the whole

reading journey will be a thought-provoking, enlightening and insightful experience that will

bring much fruition to your personal and professional life.

The intent of this book is to give the overall view of the business and how to look beyond the

financial statements so as to obtain its miracle result. As such, it will equip the users with know-

how, mindset and skill to discover its hidden benefits. You will be empowered through this

enriched experience and dimension at the end of day. This will help you to build a solid financial

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61

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