cover next page > title: If You're Clueless About Accounting and Finance and Want to Know More author: Godin, Seth.; Lim, Paul. publisher: Kaplan Publishing isbn10 | asin: 0793128811 print isbn13: 9780793128815 ebook isbn13: 9780585210193 language: English subject Corporations United States Accounting, Corporations United States Finance. publication date: 1998 lcc: HF5686.C7G5 1998eb ddc: 658.15 subject: Corporations United States Accounting, Corporations United States Finance. cover next page > < previous page page_i next page > Page i If You're Clueless about Accounting and Finance and Want to Know More Seth Godin Paul Lim < previous page page_i next page > cover next page > title: If You're Clueless About Accounting and Finance and Want to Know More author: Godin, Seth.; Lim, Paul. publisher: Kaplan Publishing isbn10 | asin: 0793128811 print isbn13: 9780793128815 ebook isbn13: 9780585210193 language: English subject Corporations United States Accounting, Corporations United States Finance. publication date: 1998 lcc: HF5686.C7G5 1998eb ddc: 658.15 subject: Corporations United States Accounting, Corporations United States Finance. cover next page > < previous page page_ii next page > Page ii If You're Clueless about Accounting and Finance and Want to Know More This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in the rendering of legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Executive Editor: Cynthia A. Zigmund Managing Editor: Jack Kiburz Interior and Cover Design: Karen Engelmann © 1998 by Seth Godin Productions, Inc. Published by Dearborn Financial Publishing, Inc.® All rights reserved. The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the publisher. Printed in the United States of America 98 99 10 9 8 7 6 5 4 3 Library of Congress Cataloging-in-Publication Data Godin, Seth. If you're clueless about accounting and finance and want to know more / Seth Godin, Paul Lim p. cm. Includes index. ISBN 0-7931-2881-1 1. CorporationsUnited StatesAccounting. 2. CorporationsUnited States Finance. I. Lim, Paul. II. Title. HF5686.C7G5 1998 658.15dc21 98-5446 CIP Dearborn books are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please call the Special Sales Manager at 800-621-9621, ext. 4384, or write to Dearborn Financial Publishing, Inc., 155 North Wacker Drive, Chicago, IL 60606-1719. < previous page page_ii next page > < previous page page_iii next page > Page iii Other Clueless books by Seth Godin: If You're Clueless about Mutual Funds and Want to Know More If You're Clueless about Retirement Planning and Want to Know More If You're Clueless about Saving Money and Want to Know More If You're Clueless about The Stock Market and Want to Know More If You're Clueless about Insurance and Want to Know More If You're Clueless about Starting Your Own Business and Want to Know More If You're Clueless about Getting a Great Job and Want to Know More (with Beth Burns) < previous page page_iii next page > < previous page page_iv next page > Page iv Acknowledgments Thanks to Jack Kiburz and Cynthia Zigmund at Dearborn for their invaluable support and guidance, and to Karen Watts, who continues to be the evil mastermind behind the Clueless concept. Thanks, too, go to Linda Carbone, Susan Kushnick, Theresa Cassaboon, Shelley Flannery, Rebecca Wald, and Sidney Short for their top-drawer bookmaking skills. Last, but certainly not least, we appreciate the insight and hard work of the whole crew at SGP, especially Nana Sledzieski, Lisa Lindsay, and Wendy Wax. < previous page page_iv next page > < previous page page_v next page > Page v Contents Chapter One: Getting a Clue about Accounting and Finance 1 Chapter Two: Getting to Know the Players 9 Chapter Three: Understanding the Language of Accounting 17 Chapter Four: Understanding the Foibles of Accounting 37 Chapter Five: Picking up Clues from Financial Statements 55 Chapter Six: Using Key Financial Ratios 77 Chapter Seven: Understanding How Budgets Work 87 Chapter Eight: Understanding Cost Accounting 111 Chapter Nine: Managing Your Cash through the Year 123 Chapter Ten: Managing Credit without Fear 145 Chapter Eleven: Managing Your Own Inventories 155 Chapter Twelve: Understanding How Taxes Affect Your Company 169 Chapter Thirteen: Borrowing Money and Raising Capital 181 Chapter Fourteen: How the Economy Affects Your Company's Finances 193 Glossary 211 Resources 221 Index 225 < previous page page_v next page > < previous page page_1 next page > Page 1 Chapter One Getting a Clue about Accounting and Finance We all play a role in our company's finances, whether we realize it or noteven those of us who don't hold traditional finance jobs. For instance, if you're a sales manager or an ad manager, you can influence the speed with which your company makes its sales and converts its inventory into cash. Obviously, this has an effect on the way your company manages its finances. If sales are strong, your company may be able to build new stores, buy more goods, and hire more employees with the cash being generated from its sales. If sales are weak, it may have to borrow money or seek other forms of financing to do those things. If you're a computer programmer or a shipping clerk, you play a role in the process, too: You influence the speed with which information and goods flow into and out of your company. If information and merchandise move faster than normal, costs are reduced. If they move slower, expenses rise. So this, too, has an impact on how your < previous page page_1 next page > < previous page page_2 next page > Page 2 FINANCIAL FACTOID When it comes to finance, American companies appear to be getting a clue. From 1988 to 1996, they reduced the amount of money they spent on basic accounting and financial chores from 2.2 percent of their annual revenues down to 1.4 percent. That's a 36 percent savings. company's finances must be managed. In fact, there isn't a single department, division, work unit, or employee who doesn't come into contact with a company's finances. Assets and liabilities, and revenues and expenses, are affected every time an employee is hired, merchandise is moved, or paperwork is pushed. What You Do Matters Let's say you're a sales representative at a wholesale bakery, in charge of $100 million in accounts. It takes some bakeries as long as 30 days to collect their money after all those loaves of bread and other delicacies have been delivered to their customers. Some bakeries, though, get their customers to pay up in about 25 days. If you could convince your clients to do the same, you could save your company nearly $36,000 a month, or nearly $140,000 a year. How is that possible? Assuming that the company invests that money as soon as it collects it, the money would earn $27,800 a day for each day it was collected sooner, assuming a 10 percent annual rate of return. Now if you could somehow persuade your customers to pay in 15 dayswhich some companies doyou would save the firm about $417,000. Of course, not all of us are in charge of $100 million in accounts. What if you just work in your company's payroll department? According to the American Institute of Certified Public Accountants, the average large American company spends $1.91 to process each weekly paycheck. Efficient companies can do it for just 36 cents per check. Now imagine: If you could find a software program to streamline the payroll process and bring your company's costs down from $1.91 to even 50 cents a check, you could save your bosses nearly $370,000 a year, assuming you work for a company with < previous page page_2 next page > < previous page page_3 next page > Page 3 5,000 employees. How? By saving $1.41 per check, with 5,000 employees the company would issue 260,000 weekly paychecks a year: 260,000 x 1.41 = $366,600. In ten years, that's close to $4 million. In reality, though, your company would invest those savings each year. So, if we again assume a 10 percent annual rate of return, you would end up saving your company more than $5.8 million over the course of a decade. (Note that numbers will be rounded off for calculations in this book.) How all this can be possible will become clear to you once you learn how your company's finances work. What Is Finance? Finance is the art of raising, managing, and making money in business. It's not a synonym for accounting, nor is it interchangeable with banking. However, both accounting and banking have something to do with it. Finance is a process that involves three essential steps: • Assessing the financial performance and health of your firm • Using that information to plan for future performance • Executing that plan Once a company finishes the third stepexecuting its planit goes back and reassesses its performance, and this cycle of finance repeats itself in a continuous loop. We'll explain each step throughout this book. Just as You Affect Finance, Finance Affects You But what if your job doesn't involve assessing your firm's finances? What if you don't take part in strategic planning? Or, what if you don't manage your own department and aren't in a position to supervise the execution of the company's plan? You don't have to be an accountantor have an MBAto be affected by your company's finances. There isn't a single department in a company that finance doesn't touch. < previous page page_3 next page > [...]... next page > Page 4 And if you're an investor wondering whether it makes sense to plunk your money into one company versus another, you'll know how to assess their relative strengths and weaknesses by understanding the cycle of finance Accounting 101 Before you learn how the cycle of finance works, you have to know something about accounting Sorry There's no way to get around this Since accounting is the... Pennsylvaniaare actually geared toward training CFOseven more so than CEOs • Managerial accounting To make day -to- day decisions on how to manage cash, credit, inventories, liabilities and expenses, companies often need to see the "little picture," too In addition to information found on the balance sheet, income statement, and cash flow statement, they need to know how specific assets and divisions are performing... transactions and trendssuch as product-specific sales, site-specific inventories, and divisional expensesthat company officials use to make routine decisions For instance, the managers of Playtown Toys may want to know how many video games the company actually sold last week compared to how many it expected to sell, to help them determine whether or not to adjust their inventory Accountants routinely compile... recorded, you've got to learn some of its vocabulary to understand what's going on Perhaps you're a plant manager, and your company has asked you to help rethink how the facility operates In addition to reviewing flow charts, you may be asked to study financial statements, budgets, and reports Even if you don't have to read these financial statements, knowing how to read themand understanding the financial... businesses to measure things in a relatively consistent manner Imagine what would happen if businesses didn't conform to standard accounting practices Let's say you work for Playtown Toys, a company that doesn't care about its accounting practices One day, your boss asks you to compare the sales trends of the company's two divisionsits Electronic Games division and its Traditional Toys unit You go over to. .. impossible to tell By enforcing some degree of consistency within and among companies, proper accounting allows us to compare and assess a company's health Managerial Accounting As we noted in chapter 2, there are two forms of accounting: managerial accounting and financial accounting Managerial accounting keeps track of the ''little picture.'' It captures data on day -to- day business transactions and trendssuch... vehicle fleet, for instance, and the company decides to lease rather than buy, you'll understand why If you manage a work unit and find that your budget is being cut by 10 percent, you may be able to find alternative cuts to those that the division head is proposing In fact, if you're a division head, you may be forced to learn this stuff, since more and more companies are demanding that individual divisions... useful to: • Prospective investors • The Internal Revenue Service • The Securities and Exchange Commission and other government agencies Because outsiders require this information, too, financial accounting standards are often more rigid than managerial accounting standards For instance, financial accounting statements must be audited And they must conform with generally accepted accounting principles (GAAP)... Language of Accounting You don't need to be an accountant to understand how finance works But you do need to understand some of the basic concepts of accountingbeginning with a definition of accounting itself Accounting is a set of rules The rules govern how businesses record transactions, such as the sale or purchase of a product, and how they account for the things they owe and own Though frustrating in... asset to a farmer who uses it to work his land Down the street, a farm equipment manufacturer may classify tractors as current assets, since they are a part of inventory, which will be converted into cash in the normal cycle of business < previous page page_20 next page > page_21 < previous page next page > Page 21 Key Differences: Managerial vs Financial Accounting Managerial Accounting Financial Accounting . Clueless about Saving Money and Want to Know More If You're Clueless about The Stock Market and Want to Know More If You're Clueless about Insurance and Want to Know More If You're Clueless. iii Other Clueless books by Seth Godin: If You're Clueless about Mutual Funds and Want to Know More If You're Clueless about Retirement Planning and Want to Know More If You're Clueless. > Page ii If You're Clueless about Accounting and Finance and Want to Know More This publication is designed to provide accurate and authoritative information in regard to the subject