Contents Preface ix 1. Counting the Beans: How Critical Is Good Financial Information, Anyway? 1 Managing a Company in Today’s Business Environment 1 The Role of the Finance Department 5 GAAP: The “Rules” of Financial Reporting 7 The Relationship of Finance and Accounting to the Other Departments 9 Manager’s Checklist for Chapter 1 11 2. The Structure and Interrelationship of Financial Statements 12 Tracking the Life Cycle of a Company 14 Accounting Is Like a Football Game on Videotape 16 The Chart of Accounts—A Collection of Buckets 20 The General Ledger—Balancing the Buckets 23 Accrual Accounting—Say What? 25 The Principal Financial Statements Defined 27 Manager’s Checklist for Chapter 230 3. The Balance Sheet: Basic Summary of Value and Ownership 31 Assets and Ownership—They Really Do Balance! 31 Current Assets—Liquidity Makes Things Flow 34 Fixed Assets—Property and Possessions 39 Other Assets—The “Everything Else” Category 41 Current Liabilities—Repayment Is Key 41 Long-Term Liabilities—Borrowed Capital 45 Ownership Comes in Various Forms 46 Using This Report Effectively 49 Manager’s Checklist for Chapter 3 49 4. The Income Statement: The Flow of Progress 51 They Say Timing Is Everything—And They’re Right! 51 Sales: The Grease for the Engine 54 Cost of Sales: What It Takes to Earn the Sale 55 Gross Profit: The First Measure of Profitability 56 Operating Expenses: Running the Business 57 Operating Income: The Basic Business Bottom Line 60 EBITDA—He Bit Who? 61 Other Income and Expenses—Not Just Odds and Ends 61 Income Before Taxes, Income Taxes, and Net Income 62 Earnings per Share, Before and After Dilution—What? 63 Using This Report Effectively 65 Manager’s Checklist for Chapter 4 66 5. A Profit vs. Cash Flow: What’s the Difference— and Who Cares? 67 The Cash Flow Cycle 68 Cash Basis vs. Accrual Basis 74 Net Profit vs. Net Cash Flow in Your Financial Reports 76 Manager’s Checklist for Chapter 5 81 6. The Cash Flow Statement: Tracking the King 83 Beginning Where the Income Statement Ends 85 Cash from Operations—Running the Business 87 Cash for Investing—Building the Business 93 Cash from Financing—Capitalizing the Business 95 Using This Report Effectively 97 Manager’s Checklist for Chapter 6 98 7. Critical Performance Factors: Finding the “Hidden” Information 99 What Are CPFs? Do They Mix with Water? 100 Measures of Financial Condition and Net Worth 101 Measures of Profitability 105 Measures of Financial Leverage 108 Measures of Productivity 112 Trend Reporting: Using History to Predict the Future 115 Manager’s Checklist for Chapter 7 119 8. Cost Accounting: A Really Short Course in Manufacturing Productivity 121 The Purpose of Cost Accounting—Strictly for Insiders 122 Fixed and Variable Expenses in the Factory 128 Controllable and Uncontrollable Expenses 130 Standard Costs—Little Things Mean a Lot 132 Manufacturing Cost Variances—Analysis for Action 134 Manager’s Checklist for Chapter 8 136 9. Business Planning: Creating the Future You Want, Step by Step 138 Why Take Time to Plan? 138 Strategic Planning vs. Operational Planning 141 Vision and Mission—The Starting Point 143 Strategy—Setting Direction 145 Long-Term Goals—The Path to the Mission 145 Short-Term Goals and Milestones—The Operating Plan 147 Manager’s Checklist for Chapter 9 153 10. The Annual Budget: Financing Your Plans 155 Tools for Telling the Future: Budgets, Forecasts, Projections, and Tea Leaves 156 How to Budget for Revenues—The “Unpredictable” Starting Point 157 Budgeting Costs—Understanding Relationships That Affect Costs 160 The Budgeting Process—Trial and Error 162