Is it worth learning how to make detailed financial statements?

Peter, Think of yourself like a conductor you’ve been asked to conduct Vivaldi‘s Four Seasons. You know how crucial the violin is but this is the wrong time to rozen up your seldom used bow. Your job is to find the best person to do that for you and have a real appreciation of how to interpret and guide their work.

Searchers are usually well educated, highly intelligent and motivated. This is a trap because it means they have the ability to turn them self to almost anything and they sometimes do. It’s a form of ‘make busy’ and it has them congratulating themselves on their diligence and efforts whilst not really moving the ball towards the end zone.

A skilled craftsman can take historic financial statements, understand all the key drivers and variables, and make a detailed three-way financial model that shows historical information and forecast information for profit and loss, balance sheet and cash flows. These are essential for you to understand the business and its drivers and it is essential for your equity investors and your financiers however, there are many people who can undertake this task quickly efficiently and with a minimum of your time.

Sit down and write out a list of the five things that you can do in the next two weeks that are highly value adding, play to your skill set and are difficult to outsource.

Building a financial model will not be on this list.

I'd argue there are 2 types of modelling. 1) Transactional modelling - where you take already prepared financials and add bits on (e.g. building a LBO); 2) Direct modelling - where you model out / build forecasts for a business from downloaded accounting trial balances / ledgers. I think transactional modelling for small deals can often be done on the back of an envelope, but direct modelling knowledge is essential, and takes time to learn. I've worked on several distressed PE deals where great companies with strong products ran out of cash and went into bankruptcy. These companies all had poor accounting systems that required lots of manual intervention / adjustments, had poor visibility of their cash positions, and assumed that if they build great products with strong gross margins, "bean counting accounting" would take care of itself. Financials are the KPIs / dashboard of your business - if your role is to steer the company, then it's pretty essential you understand them and the financial systems / controls used to build them inside out. Especially if you've taken out a lot of debt to buy the business