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What to look for in financial statements

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Ray’s boss gave him the company’s latest financial data and asked, “Well, what do you think?” Ray scanned the numbers, unsure of what to say. He noticed some surprises—unusually high expenses and low customer retention. But he also sensed his boss was pleased, so Ray tried to accentuate the positive.

There’s nothing more embarrassing than trying to make sense of reams of numbers while your boss waits for your brilliant insights. It’s moments like this when you need keen data-analysis skills.

You also need time. Advice: Celebrate any news that obviously pleases your boss and ask for a certain amount of time to analyze the rest of the report. Then dig in and ask yourself these questions:

Is the source reliable? Before drawing conclusions, investigate how the information was formulated. If an independent consultant with experience designing questionnaires created the survey and crunched the numbers, that adds credibility. But if you identify a biased or unqualified source, ranging from a sloppy accountant to untested software, factor your doubts into your analysis.

Can I verify the information? Confirm the accuracy of any data before you carry it too far. Assess its validity by examining how it was gathered, tabulated and presented. If possible, run an experiment to see if the data matches your observations.

What drives the data? Numbers don’t exist in a vacuum; they flow from dozens of variables. Pinpoint what forces shape the data and cause fluctuation over time. This is especially important when you compare financials by year or by quarter, when influences such as a surging economy or demographic shifts can explain wide swings.

What do you expect? If you examine data with preexisting notions of what you’re looking for and what you expect to find, you’ll emphasize the numbers that reinforce your beliefs and disregard what doesn’t fit. Stay neutral and weigh all the information fairly.

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