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Introduction

This book explains (as no other) finance and accounting from a strategic perspective and not from the sources of transaction data - the important but often downplayed bookkeeping; not from trying to understand the disparate aspects of the accounting and reporting process in some ad hoc manner but from the stance of the prime use of accounting, which is to plan, implement and track strategies through modelling and financial reporting both internal and external. This book thus gives a coherent and focused understanding of finance and financial statements anchored on the premise that finance, accounting and accountants are there to serve businesses - to be the core tool for identifying, modelling and delivering strategy and therefore business success and sustainability.

There are many purposes of financial reporting. Historically, the purpose of bookkeeping and preparing balance sheets was to control, the need for control being a key driver to create and set out the rules for single- and then double-entry bookkeeping, a system designed among other things to prevent the excesses of rogue traders (does anything ever change?) but also to assist owners in knowing where their expanding businesses were heading.

As industry blossomed in the 19th century and management and ownership of capital (invested money) grew apart, stewardship of assets under management became a prime reason for reliable (audited) accounts, and this remains true today. The latest thinking on the purpose of finance and accounting, particularly financial reporting, is to be found in a term coined by the IASB (International Accounting Standards Board) Framework - 'decision useful', a clear but inelegant term. The economist mindset which pervades accounting standard setters and accounting academics pushes the idea of what 'decision useful' might mean beyond sensible limits, and could even be blamed for causing moral hazard, for example when valuing assets and liabilities. Examples are to be found where 'fair values' have to be adopted:

Should not a liability have a single fair value, being the amount you have to repay in full to settle the debt? Possibly, but a fair value may be a lower amount of liability where the 'market' indicates so.

or

Should the fair value measurement of a non-financial asset take into account a market participant's ability to generate economic benefits by using the asset in its highest and best use?

These examples indicate that accounting today is more sophisticated (in a complex and complicated manner) than many would suppose. Strategies may be hidden or prevented by accounting practice.

But you may well be wondering what the history of bookkeeping and accounting theory has to do with strategy. It is the author's view, supported by years of observing the best (and worst) companies both large and small, that successful companies have a very clear understanding of the prime reason for the finance function and its outputs, namely to quantify, implement and track delivery of strategies with the clear aim of achieving the company's objectives.

Accounting and financial statements may be the domain of the accountant but they do not belong to the accountant. The purpose of accountants and much of the responsibility of the finance director or chief financial officer is to be the servant of the business - to keep the records, ensure the safe custody of assets and limitation of liabilities, and then to report your activity and business to you - the managing director, chief executive officer, production, sales or other board member or senior manager; responsibility for understanding the figures and tracking your strategy then passes to you!

This book therefore aims to explain what you can expect to get out of the reports, the figures, the models for your business. Accountants produce reports and form the business models, but these are not their figures but yours - you must understand them.

This book leads you to the quantification of your strategy or supports your questioning of others' strategies. If you are going to win the battle, any strategy ought to be quantifiable. The book explains how your strategy can be revealed and then measured with numbers - currency values - in monetary terms.

Many companies' strategies are explained as actions that will achieve the desired goals or often vaguer 'visions' - but business strategies will be manifest in financial statements - greater or less income, higher or lower costs, thus higher or lower profits - with resultant increases/decreases in net assets and cash flows. Numbers will reveal the success or failure of strategy. More importantly, financial models can clearly demonstrate where a particular strategy might lead.

All the chapters of this book are focused on finance as record keeper and predictor of business strategies - clear figures allow no hiding place.

The majority of books on finance for non-accountants focus of clarifying jargon, myth busting, explaining terminology, explaining why accountants have their rituals; they do not explain that finance is the revealer (or illuminator?) of strategy.

Strategically, why is anyone in business? Successful and long-lived (sustained) companies understand the reasons. When directors (maybe under the influence of their short-termist shareholders) lose sight of why they are in business, ego, indolence or incompetence leads to value if not company destruction.

Companies will cease to exist without sales or revenue streams, but also costs - both operating and capital - have to be managed. Finance is at the heart of any business - businesses would not exist without the pumping of cash through the business and the consequent recording of the flows.

 
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