Every business or non-profit organization has to have an accounting and finance system in place with specific processes and procedures for recording daily transactions. The big word in that statement is ‘every.’ While accounting is one of those critical business functions that every business needs, it also happens to be one of those operations that only a select few in the company actually understand.
A new book, Finance & Accounting, (Wharton Digital Press, 2011, ISBN: 978-1-61363-009-9) by Richard A. Lambert attempts to explain the main three statements of a financial system that can help managers and others within a company to make sound decisions. This book is part of the Wharton Executive Education Essentials series of books.
What Managers Need to Know About Accounting
Lambert starts by writing, “Business decisions need to be based on information, and financial statements are a major source of this information. But many managers don’t have a background in accounting and finance, so they don’t have the tools they need to answer questions.”
The author focuses on the three fundamental financial statements including the balance sheet, income statement and statement of cash flows. There are many ways to teach accounting and one of the best is to start with the finished product and work back through how the numbers were compiled on those three accounting reports. This author’s approach doesn’t spend much time on where the numbers came from, instead he takes readers forward with how to use the information once it has been compiled.
The Three Financial Statements for Decision Making
Those three financial statements, balance sheet, income statement and statement of cash flow, determine most decisions for investment, spending, hiring, expansion or adding or eliminating products and services. All of the transactions that get entered into an accounting system are done so to represent the business on the three financial statements.
Lambert uses the first chapter to discuss the financial statements and the remaining chapters illustrating how to follow the line items on the statements, how to determine profit and loss, income versus profit, determining ROA (Return on Assets), ROE (Return on Equity) and leverage plus:
- How the financial statements relate to each other
- Dissecting the income statement and balance sheet to understand drivers for profitability
- How to evaluate investment strategies
- Using all of the information presented to develop a current business strategy
Accounting Definitions
Lambert does include many accounting terms along with definitions. For example, “The income statement, sometimes called the statement of earnings, is often the statement that people pay the most attention to because it measures what owners care most directly about: profits.”
The book also includes one of the standard accounting formulad, Assets = Liabilities + Owner’s Equity. One vital piece of information not included was the ‘every debit needs a credit’ which is critical to understanding some of the examples Lambert provides.
There are many managers that work for small manufacturers and other small types of businesses that need a short, to-the-point reference book that this book had great promise of being. It fell a bit short of such aspirations. The language used was not for the faint of heart. One example, Lambert uses the word ‘prototypical’ when describing transactions. It would be less intimidating if the word ‘standard’ or ‘everyday’ was used instead.
The language involved with accounting is frightening enough for those non-accounting types that using unnecessarily pretentious words like prototypical may keep this book from reaching the stated intended audience.
Scorecards for Business Decisions
While some of the language is too technical or overly complicated, Lambert does include many relatable points such as, “Cash flow statements, balance sheets, and income statements operate like scorecards of how well the company is doing. The manager’s job is to interpret this data and use it to revise his or her operational, investing, and financing decisions.”
The book is only 148 pages and really is packed full of details. Drilling down the financial statements is hands down the best way for non-accounting people to learn the whys and how’s of the accounting function, making Lambert’s overall approach effective.
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