Being able to get an overview of a financial statement quickly is important to determine if additional time should be allocated to a thorough review.
This is one of the skills my students will learn this semester in my Baruch College Introduction to Managerial Accounting course.
The course aims to teach students how to determine what data is needed, how to use and apply the data, understand its reliability and how timely the data should be. Managers do not need to know how to generate the data but must know how to use it. They will need many types of information and different ways to use them. This is a relevant, interesting, and exciting course, and I look forward to sharing my knowledge with the bright students at Baruch (which is my alma mater).
Understanding Financial Statements
Last week, to jump-start the course, I provided an overview of the seven elements of the financial statement. The students already took a pre-requisite course on creating the statements but didn’t cover how to use and integrate them with decisions that managers would need to make. Understanding the structure is essential, so I began with that. The 79 students had a Form 10-K of their choosing. In total, around 40 different companies were represented, and I had many of the students read excerpts from their selected 10-K. While each company’s financial statement was different, the structures were similar. This introduction to the real world of accounting data sets a good framework for the course.
Balance Sheet Deep Dive
For this week’s session, I will introduce the students to certain parts of the balance sheet that a manager should be familiar with and comfortable with. I got this idea from listening to a pair of financial commentators talking about the need for the CEO of a company with cash flow problems to address “fixing the balance” sheet.
Managers typically focus on the statement of operations items, while the balance sheet is left to the financial accountants and the CFO. However, every company is multifaceted, and an effective manager needs to use every tool within their reach – and also some outside their reach!
Fixing the balance sheet applies to an overall impression that the company’s internal fiscal strength is in jeopardy or that there is a dearth of sufficient cash or cash flow. Here are some examples.
- Long-term debt may be greater than the company’s ability to service it. This means that making the interest and principal payments as due is a struggle and a drain on the company’s cash resources. This would redirect management’s thinking about innovation, new products and market development toward cash flow and debt service. Usually, this is a dissipating activity.
- Another time-draining activity is to look to reduce inventory to free up cash. This involves marketing, pricing, logistics, market position and product availability considerations.
- Other time diversions are reducing accounts receivable, better-managing accounts payable, and rethinking capital budgets.
- The Board could also reconsider its dividend policy, which is beyond the manager’s scope, but not the CEO’s.
- From a macro management view, the manager’s time would be spent on managing the Statement of Cash Flows more so than the Cost of Goods Sold section, which determines the gross margins, which is a number Wall Street analysts and lenders pay a lot of attention to.
There are ratios (and many other metrics) for everything I discussed above. Managers have access to this information and are unlikely to be surprised. The difference comes at the point when the manager is forced to pay added attention to the balance sheet.
Competing Priorities
Managing a business, or not-for-profit or governmental unit, is a juggling act, and priorities need to be established. When things run well, the sequence of activities is routine. When things veer off course, the manager needs to arise to the occasion and keep things from getting out of control.
My Introduction to Managerial Accounting course will teach one tool at a time so that managers can become better managers.
Comment: My Memoirs as a CPA book has been published and is available in Kindle and print editions at amazon.com. Buy it, read it and enjoy it!
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If you have any tax, business, financial or leadership or management issues you want to discuss please do not hesitate to contact me.
