Karen Berman > Quotes

“It might surprise you to know that, for the most part, finance involves addition and subtraction. When finance people get really fancy, they multiply and divide. We never have to take the second derivative of a function or determine the area under a curve (sorry, engineers). So have no fear: the math is easy. And calculators are cheap. You don't need to be a rocket scientist to be financially intelligent.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“First, he evaluates a business on its long-term rather than its short-term prospects. Second, he always looks for businesses he understands. (This led him to avoid many Internet-related investments.) And third, when he examines financial statements, he places the greatest emphasis on a measure of cash flow that he calls owner earnings.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“capital expenditure is the purchase of an item that’s considered a long-term investment,”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“revenue must have been earned. A products company must have shipped the product.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“No matter whose income statement you’re looking at, there will be three main categories. One is sales, which may be called revenue (it’s the same thing). Sales or revenue is always at the top. When people refer to “top-line growth,” that’s what they mean: sales growth. Costs and expenses are in the middle, and profit is at the bottom”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Profit is based on revenue. Revenue, remember, is recognized when a product or service is delivered, not when the bill is paid.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“We’ll get to all the details later; for the moment, all you need to know is that an operating expense reduces the bottom line immediately, and a capital expenditure spreads the hit out over several accounting periods. You can see the temptation here: Wait. You mean if we take all those office supply purchases and call them “capital expenditures,” we can increase our profit accordingly?”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Materiality Material in accountant-speak means something significant—something that would affect the judgment of an informed investor about the company’s financial situation. Every material event or piece of information must be disclosed, typically in the footnotes of financial statements.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“But GAAP rules are not what most people might think of as "rules." They don't take the form of imperatives, such as "Count this expense exactly this way" or "Count this revenue exactly that way." They are guidelines and principles, and so are open to interpretation and judgment calls.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“when a company expects a loss, the loss must show up in the financial statements as soon as it can be quantified—that is, as soon as the amounts involved are known. Accountants call this recognizing a loss.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Another part of operating expenses that is often buried in that SG&A line is depreciation and amortization. How this expense is treated can greatly affect the profit on an income statement.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“The revenue line is taken as a given—a fixed point—and everything else is compared with it.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Return on assets, or ROA, tells you what percentage of every dollar invested in the business was returned to you as profit.”
― Karen Berman, Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers

“The “line” generally refers to gross profit. Above that line on the income statement, typically, are sales and COGS or COS. Below the line are operating expenses, interest, and taxes. What’s the difference? Items listed above the line tend to vary more (in the short term) than many of those below the line, and so tend to get more managerial attention.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Accounting and finance are not reality, the are a reflection of reality, and the accuracy of that reflection depends on the ability of accountants and finance professionals to make reasonable assumptions and to calculate reasonable estimates.”
― Karen Berman, Financial Intelligence

“Fraud and manipulation aside, revenue shows the dollar volume of the goods or services the company has delivered to its customers. But it’s not the only significant measure of a company’s sales success. Equally important, in many cases, are the orders that have been signed but not yet started, or the revenue not yet recognized on partially completed projects. This is the value, in other words, of what’s in the pipeline. Companies variously refer to these not-yet-recognized sales as backlog or bookings.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“You can see how far we are from cash in and cash out. Tracking the flow of cash in and out the door is the job of another financial document, namely the cash flow statement (part 4). You can also see how far we are from simple objective reality. Accountants can’t just tote up the flow of dollars; they have to decide which costs are associated with the sales. They have to make assumptions and come up with estimates. In the process, they may introduce bias into the numbers.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“The fact that there aren’t any, frankly, is a little surprising. GAAP runs for many thousands of pages and spells out a lot of detailed rules. You’d think GAAP would say, “The plant manager is out,” or “The supervisor is in.” No such luck; GAAP only provides guidelines. Companies take those guidelines and apply a logic that makes sense for their particular situations. The key, as accountants like to say, is reasonableness and consistency. So long as a company’s logic is reasonable, and so long as that logic is applied consistently, whatever it wants to do is OK.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Remember, accounting is the art of using limited data to come as close as possible to an accurate description of how well a company is performing.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Just as an aside, the most common source of accounting fraud has been and probably always will be in that top line: sales. Many companies play with revenue recognition in questionable ways. The issue is particularly acute in the software industry. Software companies often sell their products to resellers, who then sell the products to end users. Manufacturers, under pressure from Wall Street to make their numbers, are frequently tempted to ship unordered software to these distributors at the end of a quarter. (The practice is known as channel stuffing.)”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Absent in such knowledge, what happens? Simple: the people from accounting and finance control the decisions. We use the word control because when decisions are based on numbers, and when the numbers are based on accountants' assumptions and estimates, then the accountants and finance folks have effective control (even if they aren't trying to control anything). That's why you should need to know what questions to ask.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Capital Expenditures A capital expenditure is the purchase of an item that’s considered a long-term investment, such as computer systems and equipment. Most companies follow the rule that any purchase over a certain dollar amount counts as a capital expenditure, while anything less is an operating expense. Operating expenses show up on the income statement, and thus reduce profit. Capital expenditures show up on the balance sheet; only the depreciation of a piece of capital equipment appears on the income statement. More on this in chapters 5 and 11”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“gross margin,” “operating income,” “net profit,” and “earnings per share.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“revenue should be recognized when (and only when) it is actually earned. Deferred revenue is money that has come in but is as yet unearned. So it can’t go into the income statement. Instead, accountants put deferred revenue on the balance sheet as a liability—that is, an amount that the company owes to somebody else.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“The matching principle applies to service companies as well as product companies. A consulting firm, for example, sells billable hours, meaning the time each consultant is working with a client. Accountants still need to match all the expenses associated with the time—marketing costs, materials costs, research costs, and so on—to the associated revenue.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“An accrual is the portion of a revenue or expense item that is recorded in a particular time span.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“Remember that many numbers on the income statement reflect estimates and assumptions. Accountants have decided to include some transactions here and not there. They have decided to estimate one way and not another.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“For instance, maybe senior executives have decided that selling expenses shouldn’t be more than 12 percent of sales. If the number creeps up much above 12 percent, the sales organization had better watch out. It’s the same with the budget and variance numbers. (“Variance” just means difference.) If the actual number is way off budget—that is, if the variance is high—you can be sure that somebody will want to know why. Financially savvy managers always identify variances to budget and find out why they occurred.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“You can find 10-Ks, 10-Qs, and other forms that are required SEC filings on the websites of individual companies and on the SEC’s website. The latter uses a database called EDGAR and contains a tutorial on how to use it.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean

“a company is making a profit in any given time period doesn’t mean it will have the cash to pay its bills. Profit is always an estimate—and you can’t spend estimates.”
― Karen Berman, Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean