Why should
CIOs, network managers or even database programmers be able to
understand a company's statement of income?
Two reasons: To analyze their own company and figure out how
their information technology department can contribute to it. And to
be able to determine whether a vendor or potential merger partner is
a good bet.
"It's important for anyone in the technology arena to be able to
read and comprehend an income statement because profitability runs
corporations. And if a company is not profitable for a certain
period of time, it cannot stay in business," says Alan D. Kahn,
president of The AJK Financial Group, a Syosset, N.Y.-based
financial planning and accounting firm.
When a CIO sits down with a chief financial officer or controller
to lobby for technology investments, "they need to be able to
quantify the impact" that IT investments and technology projects are
having on the bottom line, Kahn says.
Barometer Reading
Reading a statement of income is a lot like looking at a
barometer to get a weather forecast. These reports can help IT
professionals determine if the vendors they're thinking about
purchasing equipment from are in the center of a financial storm,
such as decreasing revenue, or are caught up in an industrywide
tsunami.
Also, with so much merger-and-acquisition activity taking place
in technology and other industries, understanding a company's income
statement can help IT professionals "determine the potential
strength or weakness of a suitor or acquiree," says Chris Loiacono,
a tax partner at Richard A. Eisner & Co. LLP, an accounting and
consulting firm in New York.
IT managers who have responsibility for profit and loss (also
known as P&L) should also be able to understand one of these
reports because a financial misstep could come back to haunt them.
For example, if the average manufacturer of air conditioners
delivers 12% gross profit and the air-conditioner maker you work at
is delivering only 8%, Loiacono says, IT and business executives
should know about it. In that case, technology could be used to
increase the profit margin.
One thing to keep in mind, though: Privately owned companies like
e-commerce start-ups typically don't publish these reports,
according to Susan Koski-Grafer, vice president of technical
activities at the Financial Executives Institute, a Morristown,
N.J.-based association for CFOs and financial executives.
Run a Credit Rating
But there's a way around that roadblock if you need to evaluate
the financial health of a vendor or potential partner. You can pay
an information services vendor like The Dun & Bradstreet Corp.
to run a credit rating on a company or find the profitability trends
within a subsector of that industry, says Dewey Norton, vice
president of finance at The Ricon Group, a Panorama City,
Calif.-based maker of wheelchair ramps and other accessories.
"You have to look at a comparative statement [of income] over two
or more years to know something about what's happening in a given
industry," Norton says. "Is a company losing market share because
everyone's sales are down in that industry, or have they lost their
technological edge?"
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