Why financial statements should not be used as the basis for day-to-day management decisions

3 June 2026

The ability to read a P&L is often interpreted as a sign of management competence.

What’s seldom recognized, however, is that it’s entirely possible to understand the profit and loss statement—and the balance sheet and cash flow statement—without truly understanding the business itself.

Financial statements can support a broad assessment of a business’s general health, and even allow rudimentary predictions about its future viability. But they do not explain how exactly that business makes money.

Management decisions—in order to be sound—need to be informed by an understanding of the latter, not just the former.

Management decisions that are made—or justified—primarily on the basis of financial statements are likely to be bad decisions. And if your accountant is encouraging (or enabling) this behavior, they are abdicating their real responsibilities!

Why the financials are not the business

If the dynamics of a business can be inferred from a set of financial statements, it’s likely that business is little more than an arbitrage play!

Genuine competitive advantage is rarely so transparent.

Financial statements do not explain how a business earns a sizable premium over its cost of capital. They do not reveal the source of a durable operational moat. And they offer almost no insight into the drivers of customers’ enduring loyalty or the day-to-day operational levers that determine performance.

Sound decisions require an understanding of how the business actually works. How it creates value today and how it will continue to do so into the future.

Financial statements do not provide this understanding because they are not designed to do so.

Financial statements are like the bloodwork your doctor orders from time to time. They provide a standardized snapshot of overall health, but they are woefully insufficient as the basis for management decisions. (Just as your bloodwork will tell your doctor very little about how to prepare you for a demanding ski trip or a long-distance bicycle race!)

The need for financial models

Management decisions are important.

Every business today is the sum of historical management decisions. And decisions today determine every business’s destiny.

So, decisions need to be informed by a deep understanding of the organization’s dynamics.

In part, this understanding can (and should) be provided by managers as a result of their knowledge of the organization and their intuition for how it functions. But management decisions also need to be supported by a financial model.

A financial model is a decision-support tool. It encapsulates an understanding of how the business works, and it renders an answer to the question ‘what if?’ in financial terms.

In addition to assisting with decisions, a model supports communication. It provides a common framework for evaluating data. This is particularly important when managers need to share information with shareholders and non-executive directors.

In practice, an organization requires two types of model. A simple one to support relatively trivial day-to-day decisions, and a number of more complex ones to support major decisions (an investment in capital equipment or the addition of a production shift, for example).

Financial statements should definitely inform the design of models, but they should never be used as a substitute.

A (less than optimal) model to support BAU decisions

Arguably, the most important model is the one that’s used throughout the organization to support business-as-usual decisions.

By business-as-usual, I mean decisions that do not materially impact the organization’s dynamics. Hundreds of decisions like this are made in a typical organization every week. Individually, each may be trivial, but collectively, they have a significant impact on the organization’s performance (which is to say, its profitability).

Here’s a story that illustrates both the dangers of using a P&L as a decision-support tool and the requirement for a BAU model.

We recently worked with a large commercial plumbing company that had acquired the manufacturer of subassemblies that their plumbers could use to dramatically improve their productivity.

The acquired company operated as a division, with its own P&L.

Over time, the division manager had raised prices to boost his division’s profits. The consequence was that the plumbing group was now buying subassemblies from other suppliers or, in some cases, allowing plumbers to do without altogether, at the expense of their productivity.

It’s easy to see from this example that the profits generated by the division were a mirage. By acting to maximize these paper profits, the division was reducing the overall company’s profitability.

Consequently, there was an urgent requirement to replace the P&L with a decision-support tool that more accurately modeled the organization’s dynamics.

It’s important to note that, in the absence of a formal decision-support model, managers tend to either maximize local profits (as was the case with our plumbing division above) or maximize local efficiency (assuming that efficiency is a proxy for local profitability).

This practice is encouraged by the distribution of P&L statements and aided and abetted by the practice of cost allocation.

The pursuit of local efficiency is actually a very poor (potentially destructive) decision-support tool that emerges naturally in the absence of a formal model. And, shockingly, members of the accounting profession—who, presumably, should know better—can frequently be found enabling this emergent behavior!

A (superior) model to support BAU decisions

If an organization is well-managed and has strong fundamentals, there is an approach to building a simple yet remarkably effective BAU model that’s hiding in plain sight.

If you have any involvement in manufacturing, you’ve almost certainly read The Goal, a bestselling book by Eli Goldratt, published in 1984.

Goldratt explains that, because of the complexity of a modern manufacturing plant, output is determined by a single resource: what he calls the Constraint. Because a single resource determines the performance of the whole, Goldratt shows that management decisions, organization-wide, can by made simply by predicting the impact they will have on the productivity of the Constraint.

This insight doesn’t just apply to manufacturing plants. Because the modern organization is at least as complex as a manufacturing plant, it can be applied to the entire organization.

To explore how this is possible, let’s consider a particularly complex organization: an airline.

An airline’s financials may be complex, but its economics are not!

To generate profit, an airline must control its operating costs, keep all its planes in the air, and maximize the contribution margin generated from each flight leg. This means selling all the seats, filling the hold with cargo, and extracting as much money as possible from both types of customer.

Profitability requires the synchronization of a large number of departments. You have aircrew, maintenance, and baggage handling. You have scheduling, catering, and logistics. You have cargo, pricing, and information technology. And so on.

But all of these departments must coalesce around a common goal: to maximize the contribution margin generated from each flight leg.

What’s interesting about an airline—and every well-managed business, for that matter—is that the Constraint doesn’t move. Or at least it shouldn’t! Southwest learned that lesson the hard way in 2022 when its outdated crew-sheduling system became overwhelmed. The result was that 16,700 flights got cancelled over a 10-day period, costing the airline about $800m.

The lesson is that, in order for the Constraint to be consistently fully activated (all the planes in the air), all other resources must have quite a bit of protective capacity. Which is to say that, in order to maximize the profitability of the airline, every resource other than the Constraint must deliberately be operated at less than full efficiency.

Our airline example leads us to three simple observations:

1. The profitability of the airline is proportional to Contribution Margin per Flight Leg (where a flight leg is the airline’s unit of Constraint capacity)
2. Every department within the airline generates value when it maintains protective capacity and either increases the numerator (Contribution Margin) or decreases the denominator (Flight Legs consumed)
3. Because the maintenance of protective capacity is critical, each department should be optimized for speed, rather than efficiency

This third observation requires a fundamentally different approach to line management. Rather than keeping all team members consistently busy, managers should induce what we might call the baggage handler mode of operation: stand idle until work arrives, then sprint to complete it, and return to idle until the next wave.

Four simple rules for a generic BAU decision-support model

We can now generalize from our airline example to arrive at four simple rules that constitute our generic, business-as-usual, decision-support model.

1. By default, optimize your department for speed
2. Do not allow the erosion of protective capacity
3. When making any decision, favor the option that increases Contribution Margin per Constraint Unit
4. Seek assistance before making a decision that is likely to cause the emergence of a bottleneck anywhere else in the organization

I suspect you’ll agree with me on two points.

First, this model makes intuitive sense. Second, while you may see fragments of it in well-managed organizations (airlines, perhaps), it represents a radical departure from standard management practice.

That is precisely why a profit and loss statement should never be used as the basis for day-to-day management decisions!

If you have an accountant who is distributing P&Ls internally (or externally) you might consider advising them to stop. Instead, have them use their financial statements as raw inputs to build a model that truly reflects the organization’s dynamics—and distribute that instead. Accountants who merely circulate statements are abdicating their real responsibility. Those who build and champion decision-support models become genuine partners in driving sustainable, system-wide performance.