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Key financial statements
Your company is preparing a plan to increase profits by 10 per cent next year. What do all managers need to understand before they can start to contribute to the plan?
All managers with collective responsibility for preparing and then implementing the plan need to understand:
♦ What is meant by the term ‘profit’
♦ How they are expected to contribute to the financial plan
♦ How their own actions will impact upon the financial measures
♦ The way in which changes in the business environment, for example, a downturn in the economy will impact upon the actions necessary to achieve the financial plan.
A company without cash cannot buy the people, materials or equipment it needs and without these a profit cannot be earned.
Owen
(2003)
In this theme you will start to develop your understanding of financial matters by investigating the main statements used to present financial information. All financial reports aim to ‘tell a story’ about how a business is performing. The financial statements tell you about past performance or plans of an organisation, and help you to make decisions about the direction of the business.
Throughout the book we ask you to relate what you learn to the practice within your organisation, and to ask questions which perhaps you have felt reluctant to ask in the past.
In this theme, you will:
♦ Explore why cash planning is essential to running a business and practise preparing a cash flow forecast
♦ Discover how profit measurement differs from cash flow and why both profit and cash are essential indicators of business performance
♦ Practise preparing a profit and loss account forecast
♦ Learn about the main types of assets in a business
♦ Prepare a simple forecast balance sheet.
Activity 1
Financial reporting
Objective
This first activity asks you to gather some information about the financial management of your own organisation, business unit or department.
Task
Ask what information is available about the financial management of your own department or business unit. Find out what:
♦ financial responsibilities different people hold
♦ reports are produced to control expenditure
♦ other reports are produced to monitor the performance of the department or business unit.
Make notes in the charts provided about the different responsibilities and financial reports. You will be returning to your own organisation's reporting in later activities, so consider this activity as the first stage of a continuing process.
| Financial responsibilities | |
| Name | Job Title | Responsibilities |
| Expenditure reports | |
| Name | When produced (weekly, monthly, etc.) | Purpose and description |
| Other reports | |
| Name | When produced (weekly, monthly, etc.) | Purpose and description |
Feedback
Don't worry if you have obtained only limited information at this stage. As you progress through this book you will be able to be more specific about the information you would like to see and so more likely to obtain examples from your workplace.
You may have been told that certain information is confidential. This is fine, just relate the information in the book as far as you are able to what happens at your workplace.
You can also relate the information in this book to the management of your own family finances. The financial management of the cash flow into and, more difficult, out of our bank accounts is something for which we all have to take responsibility.
In addition, most people have thought about starting a new business venture at some time or you may know somebody who is in business on their own. You may find it very informative to produce some of the example forecasts and statements in the text for your own business idea or to apply them to a friend's business.
Finally, as you work through the different sections, if you do not understand something on the information you have obtained, then ask your manager, colleagues or the finance specialists. This should present an excellent opportunity to expand your knowledge.
Cash is king
You may have heard the expression ‘the bottom line’, which originates from the last line of a financial statement that shows the profit for the year. In general usage, the bottom line is the end result by which the plan and the people responsible for that plan will be judged. For example, in a political election there may be all sorts of considerations, but for political activists the bottom line is whether or not their party gets elected.
Considering the origin of the expression, it is perhaps strange that for a business the true bottom line is not profit but cash. We will look at profit in the next section but first we will consider why cash is king.
Cash and cash flow
When we talk about ‘cash’ or ‘cash flow’ we are not using the words in any specialist sense. If you have more money in your bank ac...
