What Non-finance Managers Need to Know About Finance
What are the major functions of the finance organization?
Obtain Operating Funds through the issuance of debt or equity
instruments or acquisition of short-term credit.
Plan for the Use and Conservation of Resources through strategic
business planning and the use of financial and operating budgets.
Invest Available Capital to maximize return and create added value
through management of working capital accounts, both current assets and current
liabilities, and through investment of funds in long-term earnings producing
assets.
Track Performance Against Plan and Monitor Progress Toward Goals through the use of
periodic financial statements and analysis of results against established
performance measures.
What are the source of funds for your company.
Common Stock - Common stocks are shares of the corporation having voting rights, such as for the election of board members. Shareholders have no special preference to dividends. Therefore, it is a residual form of ownership in that the claims on the firm’s earnings and assets of common stockholders are considered only after claims of governments, debt holders and preferred stockholders have been met. Since common stockholders participate in the firm’s earnings only at the discretion of the directors, it is a variable income security. If only one class of stock is issued, it is common and often called capital stock. Common stock is an equity account on the Balance Sheet.
Preferred Stock - Class of stock with some preference over common stock, such as a
right to dividends before any are paid on common shares or priority with respect
to asset distribution upon liquidation. It is considered a fixed income security because it involves a
relatively constant distribution of dividends. However, it provides no voting
rights.
Debt - Bonds and long-term loans that are fixed income securities. Bonds are written contracts evidencing
long-term, interest-bearing loans, which may be either secured by mortgages on
specific assets or unsecured, referred to as debentures. Unsecured bonds and loans are made only on
the earning power and resources of the corporation.
Short-Term Borrowing - This refers to non-interest bearing ìloansî from suppliers
based on purchases made by the corporation under credit arrangements,
interest-bearing loans due within a 12-month period, and any current portion of
all long-term debt.
What do the company financial statements tell you?
Are the company's revenues growing? - Revenues are the proceeds from sales of the business's normal products and/or
services. Other items sold by the
business that are not within their normal product line, such as the sale of any
property or fixed assets, are not included in the amount reported as sales
revenue. These miscellaneous sales are
reported as other income, which also includes any interest or rental income.
What
are the sales per employee?
Sales per employee is calculated by
dividing total sales by the number of employees.
In addition to looking for this number to grow over the previous
year, you can also compare your sales per employee to that of your competitors.
Are the company's expense remaining constant or decreasing as a
percentage of sales? Expenses include all costs of operating the business.
This includes all general, administrative,
sales, marketing, distribution and human resource expenses.
Is the company's profit margin increasing or decreasing? Operating Profit
Margin is calculated by dividing Operating Profit by Net Sales.
Net Profit Margin is calculated by dividing
Net Profit by Net Sales.
Profit margins
show the percentage of every sales dollar that remain available.
Does the company have positive cash flow? Cash flow is the
difference between cash inflows (revenues) and cash outflows (expenses).
Positive cash flow results when the inflows
are greater than the outflows. Cash flows are often considered a
better measure of an operation than its earnings. Regardless of the amount of assets, without cash to operate, a
business cannot remain viable. Rapidly
expanding businesses often grow faster than their ability to internally
generate the cash flows required to meet operational and financial
commitments. When this happens, they
must seek additional cash resources outside the business.These increases in a companyís debt result
in increased financial risk. |