We are going to be looking at the Balance Sheet (BS), the Profit and Loss Statement (P&L), and the Cash Flow Statement (CF). Obviously, all three are important but the P&L and Balance Sheet can reveal much about the current and dynamic state of the financial of the organization. This knowledge, while mundane for Accountants and Financial Managers, is sometimes not well understood even by high level managers of other departments. Marketing, Operations, Human Resources, Purchasing, Quality Assurance, and Sales departments need to deal with basic financial statements on a routine basis.
To some non-financial managers, the terminology and statements of the Finance Department can be as perplexing as a foreign language or a coded message. As a young manager, I attended an American Marketing Association course called “Finance for the Non-Financial Manager”. I thought it might be a waste of my time, but it really helped me advance in the organization. After the course, when I attended management meetings and the financial group presented their data using accounting jargon, I knew just what they were saying and felt comfortable interacting with them. I also gained respect from them for knowing how they presented information.
Just as important to your future is this: if you are going to rise up through the management hierarchy and eventually become a Vice President or President/CEO, you will certainly need to be able to understand and comment on the monthly financials. And when you present information to your Board of Directors, you will need to explain and answer questions on financial information. These financial statements are important.
- For this assignment, you will examine the financial statements found on pages 549 and 550. We will use the only P&L and the Balance Sheet for this exercise. Looking at the statements from a managerial point of view, I want you to decide the five (5) most important numbers, areas, etc. that you would initially look at for each statement. While doing so, comment on each one you have chosen and explain why you have singled them out as key indicators to you. Here are a few considerations to help you make your decision:
- Which statement would you go to first? Why this one? Would you do this if you were the manager of a different department within the organization?
- If you identify areas on the statement(s) that are of concern, where might you go next to dig deeper and verify your thoughts or allay your concerns?
- Think about receiving an annual report for a stock you own. You will notice that it is thick but the statements we are looking at are but a few pages. Why is this? What is important about the rest of the report? (You can find annual reports online at the company website).
- How are these statements interrelated? Do you see any common elements on both? How would you relate the two statements to come to a conclusion on the financial health of the organization?