Mastering Business Finance
What Every Manager Should Know
Mastering Business Finance – No subject seems to pervade our lives as much as finance. Whether it’s wrestling with your family budget or seeing if your company qualifies for a bank loan, finance looms larger than any other technical subject on a daily basis.
With the downsizing of companies and staff, managers at every level are having to face financial matters in ever-greater proportions today. If you haven’t yet been asked to scale down inventories or set up financing for departmental projects, chances are you will be soon.
In today’s corporate environment, nonfinancial managers are expected to make financial decisions fast. In fact, your decision often was due “yesterday.” If that’s not enough pressure, the arrival of computers and cyberspace has given your competition access to more financial facts, in greater detail and more promptly, than ever before.
The need to make financial decisions quickly is vital to your success. There’s no time for an in‑depth study of financial concepts and their meaning when your boss or your employees are expecting a yes or no answer right away.
This report is meant to strip away the fear and confusion you may experience about finance. It explains expense and capital budgets, financial analysis and cash management, and tells you how to go about raising money—all in language that’s easy to understand.
We explain jargon where we have to use it—and where we think that a picture would be worth a thousand words, you’ll find an example or an illustration. Unlike most publications on finance, we give you not just the how but also the why of the financial process. Our goal: to bring you up to speed fast on the financial tools you need to succeed in business today.
Are You Savvy About Finance?
Before reading this report, you might find it interesting to test your current knowledge of finance. Take the following test and check your answers below.
1. Small companies generally use “S-1” T F public stock registrations in their equity offerings.
2. Another name for “income statement” is T F “statement of financial changes.”
3. “NPV” stands for “net percentage value.” T F
4. Fixed costs are so named because they T F never change.
5. A current ratio gives you a good T Findication of a company’s profitability.
6. Non‑notification factoring rids a T F company of the chore of handling bookkeeping and collection payments for its receivables.
7. “Hurdle rate” is just another name for T F “current loan rate.”
8. The payback method is a good way to T F measure the profitability of a capital project.
9. A company’s first step in the budget T F process is to come up with a cash forecast.
10. “Working capital” is a fancy label for T F a company’s cash flow.
Learning the Tools of the Trade
To get the big picture of the role finances play in your company, think about any major decision you or others within your company make. The decisions to hire, fire, buy, sell, start up or close down—all are financial nature. Almost any question that makes its way to your desk, and that requires a decision by you, can be put into financial terms.
In the strictest sense, the financial pro or officer in your company is still the one charged with making sure the company uses its assets to bring the greatest possible return on the money invested.
To accomplish that, he or she must manage those assets, measure the need for additional assets, obtain funds to finance expansion and repay borrowed funds from profits that the assets have generated. In short, the financial officer rides herd on incoming and outgoing dollars. But, in fact, every manager has at least part of that responsibility.
It should come as no surprise to you, then, that the basic tools of the trade used to carry out these tasks begin and end in dollar signs. They are called the balance sheet, the income statement and the statement of cash flows.
These financial statements are prepared by your accounting department or accountant on the accrual basis of accounting. According to the accrual accounting method, revenues are recorded when realized and expenses when incurred, regardless of the date when cash is actually received or disbursed.
For many nonfinancial managers, the accrual concept is confusing because most of us manage our personal finances on a cash basis.
Similarly, other business financial concepts create frustration and embarrassment for managers who, often unknowingly, attempt to “simplify” things by applying personal financial practices.
For instance, most of us regard our annual income on a gross basis. Rarely do we consider depreciating personal items, such as a car for wear and tear, or amortizing fewer tangible goods.
An examination of the balance sheet, income statement and statement of cash flows will reveal the importance of understanding the difference between business and personal finance.
Here’s What’s Included
The Balance Sheet
Sample Corporate Balance Sheet
- Current assets
- Fixed assets
- Other assets
- Intangible assets
- Total assets
Liabilities and Equity
- Current liabilities’
- Long-term liabilities or debt
- Total liabilities
- Shareholders’ equity (net worth)
- Total liabilities and equity
The Income Statement
- Gross sales or revenues
- Net sales or revenues
- Cost of goods sold
- Less cost of goods sold
- Gross profit
Selling and administrative costs
- Net operating profit
- Nonoperating expenses
- Net profit before taxes
- Provision for federal income taxes
- Net profit (or income) after taxes
The Statement of Cash Flows
- How the Financial Pros Use These Tools
- Troubleshooting With Ratio Analysis
- Ten Critical Ratios
Does your firm have enough cash to pay its bills?
- To leverage or not to leverage?
- How profitable is your firm?
- Should you provide credit to a customer?
- Answering Some Difficult Financial Questions
And Much More…
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