The Fundamentals of Finance and

Accounting for Non-financial Managers

 

Presented by John Kamper (john@kamper.com) of SkillPath Seminars in Seattle, WA on December 13 and 14, 2004; 9am-4pm both days. Highly recommended!

 

Background

Bob Jordan attended a two-day seminar on the Fundamentals of Finance and Accounting for Non-financial Managers. This course would be for all organizational managers and directors to attend. On-site courses are available from SkillPath.

 

Contact Information

SkillPath Seminars

Mission, Kansas

800-873-7545

 

Summary Report

The course covered (in a hurry) numerous items, including:

 

Double-Entry Accounting

Double-entry accounting is a clever system designed to keep track of data while reducing the probability of arithmetic error. Included discussion on assets, liabilities, and owner’s equity.

 

The Accounting Equation

Assets = Liabilities + Equities. The acronym “Active Exercise Lifts Everyone’s Rump” helps us to remember an expanded equation: Assets + Expenses = Liabilities + Equities + Revenues. Also discussed Debits and Credits.

 

The Balance Sheet

The Balance Sheet is a snapshot of the financial condition of the firm at a given time. Discussed current assets, current liabilities, working capital, fixed assets, long term assets, stock, equities, and retained earnings.

 

The Income Statement

The income statement gives a moving picture of “flow” type of statement. It presents the flow of revenues, costs and expenses through the corporation in any given year. The formula typical for this is (retained earnings last year) + (net income this year) – (dividends paid this year) + (retained earning this year).

 

Depreciation

Depreciation is a major expense for business (non cash bearing expense) and, as such, can have important tax implications. Depreciation is applied to any asset with a useful life of more than one year, called a capital asset. It is “capitalized” and its cost is allocated over its expected useful life. Steps in Depreciation include, 1- determine the value of the asset, 2- estimate the expected useful life of the asset, 3- make an estimate of the asset’s salvage value, and 4- select a depreciation method. Four methods of depreciation include, 1- straight line, 2- unit of production, 3- sum of years’ digits, and 4- double declining balance.

 

Cash Flow Statement

This statement provides a summary of the cash inflows and outflows for the firm. It tells what is happening to the organization’s cash. Cash flows cannot measure profit and cash flows do not reveal financial condition. There are two types of cash flows: 1- cash received from operations and 2- cash received from borrowing/financing and investing/equity.

 

Ratio Analysis

Ratios are used to evaluate the company and its performance. Ratio analysis allows us to develop a set of statistics that tells us about the financial characteristics of the organization we are analyzing. Ratios covered in class included profitability ratios, liquidity ratios, operating-efficiency ratios, and capital-structure (leverage) ratios.

 

Working Capital

Current Assents – Current Liabilities = Net Working Capital. Also knows as circulating capital. Short term financing and long term financing were reviewed as means of financing growth. The classic rule for going broke, “Borrow short and invest long.” This is what the Savings and Loans did in the early 90s.

 

Breakeven

Applications of breakeven as well as the concept of fixed costs and variable costs were reviewed.

 

Budgeting

A budget is an attempt to develop a system to plan (thus you need a goal), guide and control the financial future of an organization. The budget process can be a tool for success if used correctly and an invitation to disaster if abused. The five types of budgets were reviewed; revenue, sales, cost, expense, capital. This area was discussed a lot, with many guidelines provided. Controls and accountability were highlighted.

 

There was a budget exercise conducted with assumptions and recommendations discussed. Ingredients included the need for goals, analyzing increases in sales expenses without commensurate increases in sales, the net income analysis (profit) and areas to improve upon. Direct labor, COGS, G&A all reviewed.

 

Expenses

This received a fair amount of attention, and was listed as the area where the manager can most make a difference to the bottom line of the organization. Managers who improved on expenses were deemed worthy of higher levels of responsibility.

Common problems in controlling expenses are:

1.   No pre-approval controls in place.

2.   Coding problems.

3.   Controls not enforced.

4.   Abuses occurring at the top levels of management making enforcement impossible.

5.   Office supplies, travel, entertainment are the greatest problem area in any organization.

 

Revenue

Four basic elements of revenue forecasting include: Trends, Cycles, Seasonal Variations, Irregular Variations.

 

Sales Forecasts

Elements of a successful forecast included many features, such as: historical trend line of sales, including seasonal variations, industry forecasts, national economy forecasts, information about competitors’ plans, status of correlative indicators, etc. Forecasting tips are: Strive to achieve accuracy within 10%, avoid over-reliance on salespeople as forecasters, avoid “backward budgeting,” request, in specific terms, management’s goals for marketing, investment, and pricing, base everything on solid assumptions, allow for temporary setbacks; including contingencies, respond to arbitrary challenges by referring back to your assumptions and asking which of them has changed.

 

Cash

Cash keeps an organization operating. An organization may show profitability through its income statement, but be unable to continue operations because of a lack of cash. Cash shortages can be particularly sever during times of rapid expansion. Working Capital controls include: Cash Management, Accounts Receivable, Inventory, Debt.


Controlling the Budget

Strongly recommended that budget to actual results are compared on a monthly basis. Variances (positive or negative) are to be explained and any necessary actin taken. Use variances as a way to make more valid future assumptions. An example of a variance report was provided. The seminar text included a section on “10 Common Budgeting Mistakes and How to Avoid Them.”

 

Engineering Economic Analysis

The seminar presenter didn’t call it this (he called it Capital Budgeting), but that’s what it was. An example was provided on the “time value of money” and how to use it when considering different alternatives with different life-spans. I found their method to be confusing. I have used EE Analysis for years. My way (in all modesty) is easier to understand. I’d be happy to explain it to anyone who’s interested.

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The seminar presenter made an outstanding statement at the beginning of the class. He said that any seminar provides you with a lot of information, but it’s not learning. The learning and ownership of the materials comes through application and practice. To that end a part of the seminar included exercises with actual Annual Reports from various businesses (all publicly traded, of course). This was very worthwhile.

 

We reviewed an Aerospace firm and we reviewed a for-profit educational organization (U of Phoenix). Very interesting. The application of ratios was very revealing. Since everyone in the class had different Annual Reports, we got to hear from all of them on key indicators, including working capital, net profit, and current and quick ratios. Some businesses were making less than 1 cent on the dollar profit (a hotel chain). Some were making >10 cents on the dollar profit (U of Phoenix).

 

After the seminar I built an Excel file that can be used to analyze a business. On this form are “rules of thumb” for each ratio. Businesses must pay attention to key ratios as a part of their Strategic Planning activities.

 

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