Tracy Fast Forward MBA in Finance

1. Auflage 2002
ISBN: 978-1-312-57527-1
Verlag: bookbaby
Format: EPUB
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 337 Seiten

The Fast Forward MBA in Finance Second Edition-more necessary than ever! Even Einstein might have had a hard time making sense of the numbers that come out of the typical accounting department. These critical financial figures of a business should be presented in rational, decision-friendly accounting reports to managers. Unfortunately, accounting reports generally fall short of this mark. That's why managers rely on John Tracy and The Fast Forward MBA in Finance to help them understand all the accounting and financial information so critical to making sound business decisions. In this robust update of the popular first edition, Tracy explores the natural starting point for managers-the financial statements-and reveals the essential meaning of each. The financial statement framework is then expanded and modified for the decision-making functions of business managers. Practical examples illustrate how to use management models for analyzing profit, cash flow, and capital investment, all of which are clearly explained with a tight focus on the information needs of individual managers. The Fast Forward MBA-- the compact business companion you'll use every day! * Keep up with the newest ideas in business * Brush up on the basics you can't do without * Find direct, practical answers to complicated problems

Autoren/Hrsg.

Tracy, John A.

Leseproben

CHAPTER 1

Getting Down to Business

Every business has three primary financial tasks that determine the success or failure of the enterprise and by which its managers are judged:

• Making profit—avoiding loss and achieving profit goals by making sales or earning other income and by controlling expenses

• Cash flow—generating cash from profit and securing cash from other sources and putting the cash inflow to good use

• Financial health—deciding on the financial structure for the entity and controlling its financial condition and solvency

To continue in existence for any period of time, a business has to make profit, generate cash flow, and stay solvent.

Accomplishing these financial objectives depends on doing all the other management functions well. Business managers earn their keep by developing new products and services, expanding markets, improving productivity, anticipating changes, adapting to new technology, clarifying the business model, thinking out clear strategies, hiring and motivating people, making tough choices, solving problems, and arbitrating conflicts of interests between different constituencies (e.g.,

customers who want lower prices versus employees who want higher wages). Managers should act ethically, comply with a myriad of laws, be responsible members of society, and not harm our natural environment—all the while making profit, generating cash flow, and avoiding insolvency.

ACCOUNTING INSIDE AND OUT

Ask people to describe accounting and the most common answer you’ll get is that accounting involves a lot of record keeping and bookkeeping. Which is true. The accounting system of a business is designed to capture and record all its transactions, operations, activities, and other developments that have financial consequences. An accounting system generates many documents, forms, and reports. Even a small business has hundreds of accounts, which are needed to keep track of its sales and expenses, its assets and liabilities, and of course its cash flows. Accounting systems today are computer-based. The accounts of a business are kept on the hard disks of computers, which should be backed up frequently, of course.

The primary purpose of an accounting system is to accumulate a complete, accurate, and up-to-date base of data and information needed to perform essential functions for a business. Figure 1.1 presents a broad overview of the internal and external functions of business accounting. Note the Janus, or two-faced, nature of an accounting system that looks in two different directions—internal and external, or inside and outside the business.

In addition to facilitating day-to-day operating activities, the accounting department of a business has the responsibility of preparing two different kinds of internal reports—very detailed reports for management control and much more condensed reports for decision making. Likewise, the accounting department prepares two different kinds of external reports— financial reports for owners and lenders and tax returns for tax authorities. Accountants have a relatively free hand in designing control and decision-making reports for managers. In sharp contrast, external reporting is compliance-driven. External financial reports must comply with authoritative standards and established accounting rules. And, as I’m sure you know, tax returns must comply with tax laws.

INTERNAL FUNCTIONS OF ACCOUNTING

In addition to the day-to-day operational demands (preparing payroll checks, paying bills on time, sending out invoices to customers, etc.), Figure 1.1 reveals two other internal functions of accounting: the preparation of management control reports and reports for management decision making. Management control demands attention to a very large number of details; quite literally, thousands of things can go wrong. Management decision making, in contrast, focuses attention on relatively few key factors. Decision making looks at the forest, not the trees. For decision-making purposes, managers need accounting reports that are condensed and global in nature—that present the big picture. These reports should resonate with the business model and should be structured according to the profit and cash flow models of the business.

In passing, I should mention that accounting information seldom comprises the whole set of information needed for decision making and control. Managers use many, many other sources of information—competitors’ sales prices, delivery problems with suppliers, employee morale, and so on. Nonaccounting data comes from a wide diversity of sources, including shopping the competition, sales force reports, market research studies, personnel department records, and so on. For example, customer files are very important, and they usually include both accounting data (past sales history) and nonaccounting data (sales reps assigned to each customer).

EXTERNAL FUNCTIONS OF ACCOUNTING

Accountants have two primary external reporting responsibilities: the preparation of tax returns and external financial reports (see Figure 1.1 again). Exceedingly complex and constantly changing laws, rules, and forms govern state and federal income taxes, payroll taxes, property taxes, and sales taxes. Accountants have their hands full just keeping up with tax regulations and forms. Accountants also have to stay abreast of changing accounting standards to prepare external financial reports.

External Financial Reports

In the next chapter I present an overview of external financial reports. Please bear in mind that this book does not examine in any great detail the external financial reports of business.* This book is mainly concerned with internal reports to managers and how managers analyze the information in these reports for making decisions and for controlling the financial performance of the business. Only a few brief comments about external financial reporting of particular importance to managers are mentioned here.

The financial statements of a business that are the core of the external financial reports sent to its shareowners and lenders must conform with generally accepted accounting principles (GAAP). These are the authoritative guidelines, rules, and standards that govern external financial reporting to the outside investors and creditors of a business. The main purpose of having financial statements audited by an independent CPA firm is to test whether the statements have been prepared according to GAAP. If there are material departures from these ground rules of financial statement accounting and disclosure, the CPA auditor says so in the audit opinion on the financial statements.

External financial reports include footnotes that are an integral addendum to the financial statements. Footnotes are needed because the external financial report is directed to outside investors and creditors of the business who are not directly involved in the day-to-day affairs of the business. Managers should already know most of the information disclosed in footnotes. If managers prefer to have certain footnotes included in their internal accounting reports, the footnotes should be included—probably in much more detail and covering more sensitive matters than footnotes presented in external financial reports.

An external financial report includes three primary financial statements: One summarizes the profit-making activities of the business for the period; one summarizes the cash inflows and outflows for the same period; and one summarizes the assets of the business at the end of the period that are balanced by the claims against, and sources of, the assets.

The three primary financial statements do not come with built-in analysis. Rather, the financial statements provide an organized source of information. It’s up to the users to extract the vital signals and messages from the statements. As I explain later, managers need much more information than are reported in the external financial statements.

For example, suppose you’re about ready to lower sales prices 10 percent because you think sales volume will increase more than enough to make this a smart move. You’d better know which profit and cash flow analysis tools to use to test the impact of this decision on your business. The external profit report does not provide the information you need. Rather, you need the type of internal profit report explained in Chapter 3 to analyze just how much sales volume would have to increase in order to increase profit. You might be surprised by how much sales volume would have to increase. If you think sales volume would have to increase by only 10 percent, you are dead wrong!

A WORD ABOUT ACCOUNTING METHODS

GAAP have been developed to standardize accounting methods for measuring net income (bottom-line profit), for presenting financial condition and cash flow information, and to provide financial disclosure standards for reporting to external investors and lenders to business. Over the years GAAP have come a long way, but have not yet resulted in complete uniformity and consistency from one business to the next, or even among companies in the same industry. Businesses can choose from among different but equally acceptable accounting methods, which can cause a material difference in the profit (net income) reported for the year and in the values of certain assets, liabilities, and owners’ equity accounts reported in the financial statements of a business.

Profit depends on how it’s measured—in particular, on which accounting...