Your job depends on the way your organisation uses its money and that is at least partly down to you.
Many managers look to the accountants to manage the money – they are the financial experts aren’t they? If only it were that simple. In practice you can’t leave the money management to the accountants because it is not that sort of money. It is the money-value in the equipment, supplies, people and activities that you manage – the resources of the organisation. You manage the money by the controls you operate, by the decisions you take, the instructions you give, the problems you tackle (or fail to resolve). Everything you do will have financial consequences.
If one considers the question: “What is a manager?” one can identify three priorities of a manager’s job:
Accounting has been defined as:
“The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”.
Associated with “accounting” are various processes, record-keeping, financial controls and financial reports. As a manager you will not be effective if you do not fully understand these activities or you are unable to interpret the financial data and use this information to manage and improve your outputs.
In business today, a sound understanding of finance is an essential ingredient of career growth. If one studies the profiles of senior business executives, a large number of them have financial or accounting backgrounds. Others may have been specialists in other fields such as marketing or law, but have made it a priority to ensure that they become “literate” in the field of finance.
In compiling these study notes we were faced with a dilemma. Consideration needs to be given to the likely disparity as regards existing knowledge and understanding of accounting and financial principles. Some readers have studied this field at university and have advanced levels of understanding – for others, thinking in figures and knowing what is important about them is somewhat sketchy.
In this course we focus on the basic accounting principles such as cash flow and budgeting and a “block-building” learning approach is used, in that we start with simple concepts and “build on” in respect of complexity. In this way, those readers who have very little existing knowledge of the subject can be accommodated and brought up to speed. By the end of the course you will not be a “graphite” accountant but you will be able to apply some financial management principles.
For those of you who are well versed in the subject, we suggest that you skim through the simple parts and focus on the more advanced exercises.
THE FLOW OF MONEY (FUNDS) IN A BUSINESS
In this Chapter you will learn how to:
Money is the lifeblood of every organisation and institution in our society and there is a limited amount of it in circulation. It provides for the resources that enable the business to function. Mismanage these resources and we are literally wasting money. This weakens the organisation’s capacity to do things and to operate.
In any organisation’s field of play the accountants are the scorekeepers, but every manager is a score-maker. The accountants can advise the players about the state of play, but they neither make runs nor take the wickets. The decisions about the batting and the bowling, and the field placement that govern the score and scoring rate are made by those on the field; the players i.e. the managers and their people.
Thus every manager has to be able to work with figures and numbers – as well as the accountant does.
Accordingly, in this chapter we start off by focusing on basic arithmetic – not always as straightforward as it may seem! We will also focus on the flow of money in and out of a business.
Every manager needs to be numerate – to have the knack of thinking in figures and to know what is important about them.
The basic law of money is that it adds up. Money is stuff you count – whether it is money-for-real or money-in-things. Money is the common denominator for a host of resources that are very different in reality, but that all share one common feature, they can be figured. For example:
Each of these has a cost and must be paid for. You can do things with the figures to discover other financial facts about the resources:
The calculations we perform with the figures are useful to a greater or lesser extent. How accurately do the calculations represent the situations or events they are supposed to represent? How useful are they at telling us things that we would otherwise not realise?