Bird's Eye Business by Mike Moyer

Author:Mike Moyer [Moyer, Mike]
Language: eng
Format: epub
Published: 2019-05-08T04:00:00+00:00

Chapter 9

Finance and Accounting

Few areas within a business are as misunderstood as finance and accounting. This is because their skill sets are closely related and they both deal with the company’s money. However, their functions are quite different. The simplest explanation is that the role of the Accounting Department is to tell a company what has happened, financially, in the business, and the role of Finance is to advise the company what to do next.

Let’s say you want to figure out your personal finances. First you would sit down and create a list of all things related to your money. You might start with how much money you have in your checking and savings accounts and in any investment accounts you might own. Next you count up all your outstanding debt, such as car loans, credit card balances or student loans. After that you could make a list of all your expenses—rent, food, gas, loan payments—and income—money from a job, gifts you might get from your parents, etcetera. Once you have all of this information, you might want to create a budget by extrapolating out a few months to see what your financial situation might be in a few months or a year. The process of gathering all this information and organizing it so it can be understood is accounting.

Let’s say you want to buy a new car. In order to figure out how to pay for the car you would want to assess how much you can afford, based on the notes you prepared when you were accounting for everything. You would have to research what kind of car you want, decide how much of a down payment you could afford to pay, and then figure out how to cover the rest. You could apply for a car loan, put the balance on a credit card or even talk with your parents. The process of figuring out how you are going to pay for the car while still maintaining your current lifestyle is finance.

Accounting tells you where you have been and where you are currently. Finance helps you decide what to do in the future. In many ways accounting is a subset of Finance, but that does not diminish its importance. Many corporate CEOs have accounting backgrounds. To understand accounting is to understand the value of a good business model.

The Chief Financial Officer usually has direct responsibility for the finance and accounting functions of a business. One of his or her main functions is to provide the President and CEO with financial reports that outline the financial situation of the company—good or bad. The CFO does this by preparing financial statements.

FINANCIAL STATEMENTS

There are three types of financial statements. A Balance Sheet, Income Statement, and Cash Flow Statement. These three documents are used in most companies to provide information about a company’s financial heath at any point in time.

BALANCE SHEET

A Balance Sheet is called a balance sheet because it balances the company’s assets against its liabilities and owner’s equity. Assets refer to company property, tangible and intangible.

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