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.
