CORE CONCEPTS

-The board manages the organizational assets.
-Every organization should have adequate risk management.
-Risk can be either assumed, eliminated, protected, or even delegated.
-The board, the organization, and those associated with the organization all need to be covered with liability protection.

LEGAL AND COMPLIANCE ISSUES

-The board is responsible for watching the activities of the organization.
-Each board member has duties of overseeing the organization and each board member can be liable for breaching their personal duties.
-Under Federal and state volunteer immunity  laws give broad liability protection for volunteers and uncompensated board members for them to act within their scope of practice. But it does not prevent lawsuits.
-The Insurance for the Director’s and the Officer’s can provide coverage for both liability expenses and defense costs.

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Most people are familiar with the concept of Net Profit as a means of measuring business success and, in fact, this is what people typically are referring to when they talk about the “bottom line.” But net profit only tells part of the story.  To get a more complete picture of business performance and to begin to do an effective job of performance management, an owner needs to pay attention to two other basic key financial indicators.

Operating Cash Flows – This is, very simply, the amount of cash going in and cash going out of a business.  A positive cash flow is always a welcome event since it means that a business can meet its current obligations and pay its employees, but more than that it speaks to the quality of earnings.  Unlike net profit, cash flow is not impacted by accounting methods and policies.  It is a real event measure that can tell us not only whether a business has net income in the form of cash but how well the business is managing important assets like its accounts receivable and inventories.

Return on Assets or Equity – This is the third important “bottom line” in our trinity. It’s calculated by dividing the net profit of a business for any period into its total average assets or equity for the same period.  It shows how much profit a business is earning in relation to its total assets or equity.  As such it makes a great measure to compare a business to others in the industry or to other kinds of investments.  It answers the questions – Am I earning enough on the total assets of the business compared to my competitors? Given the risks, investment and commitment of time and effort is this business earning me an adequate return?

None of these measures, in and of themselves are perfect.  As Kremer and Rizzuto point out:

The truth is you need all three bottom lines. You need all three measures. Without them you just can’t see the big picture. Your company can look good in terms of dollar profits but poor when you consider ROA, your company can be earning a profit but be unable to meet payroll because there’s not enough cash…. With all three however, you can tell if you’re really making money. Just like the experts… you can “read the tea leaves” and identify your business’s strengths and weaknesses. More important you can use the knowledge you gain to manage the business more effectively.  From a financial perspective, improvement on the three bottom lines is the goal of a business.

At CPA Corporation “the 3 bottom lines” stands for the much broader concept of performance management.  In a larger sense, effective performance management encompasses more than just these three financial indicators.  It may involve many metrics which allow business owners and managers to measure and manage performance in many different areas of business operations, not just finances, but customer relations, human resources, internal operations, community involvement, etc.   We also feel that there are important goals and activities which involve more than just the business such as the personal and professional goals of the business owner, plans for business transition and issues of work/life balance that must also be considered, measured and monitored.

We have found, however, that the “3 Bottom Lines” concept is a good way to start a conversation about performance management and a great starting point in helping owners understand the financial statements that their accountant or bookkeeper provides.  There is no reason, as Kremer and Rizzuto point out in their book, that financials statements “have to be as obscure or as hard to understand as they sometimes are.”

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