The life cycle of a successful company progresses through periods of rapid growth, slow growth, no growth, decline, and demise. An adaptable company may endure with successive cycles of renewal, rebirth, and resurgence. This book describes a pathway to success. Finance is a sub-theme; other themes are accounting and management.
A general ledger of all transactions is used to prepare all financial reports and assess the company’s performance. Companies that issue publically traded stock are required to publish 3 financial statements every quarter of the fiscal year. They are:
- Balance sheet
- Income statement
- Cash flow
The Balance sheet is a snapshot of the company’s financial condition at the end of the fiscal period. Items are reported under headings that conform to this equation: Assets = Liabilities + Equity. Assets and Liabilities are subdivided into Current and Long-term transactions. Current transactions are expected to be completed in the next 12 months and indicate the company’s liquidity. Long-term transactions indicate the company’s leverage, plus more. Equity is the company’s net worth. Within this framework, the author explains and discusses items of special relevance to business management.
The Income statment describes business operations during the time period between 2 balance sheet dates. According to rules for accrual accounting, every transaction has an order date and delivery date. Subtotal transactions are grouped under revenues, production, operations, other transactions, and net income. Net income (i.e., company profit) is the bottom line of accrual accounting in the Income statement. Readers of this chapter learn how to evaluate the business and its managers.
More businesses fail due to the lack of cash than the lack of profit. Consequently, it’s important that the Cash Flow statement reports a net cash balance from the net cash flows of operations (CFO), investing (CFI), and finance (CFF). The CFO is derived from Net Income (in the Income statement) by excluding non-cash transactions listed in the Income statement such as depreciation, receivables, pre-paid expenses, inventory, and payables.
Finance and Management
The remaining chapters are devoted to these topics:
- Key performance indicators (KPIs) for evaluating financial statements.
- Cost accounting, the analysis of manufacturing productivity.
- Finance of new projects by previewing the return on investment (ROI), weighted cost of capital (WACC), and internal rate of return (IRR). Never invest in a project that has a negative IRR.
- Breakeven point, to determine such things as the price of a product’s launch and risk assessment.
- Creating a business plan to guide business operations and attract financial resources.
- Annual budget, part of the business plan.
- Financing the company by getting a loan (debt) or selling shares (equity).