Page 56 - Finance for Non-Financial Managers

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The Balance Sheet
Avoiding a Cash Management Pothole
Every company has to manage its accounts carefully to ensure
they get paid in full and there are no bad debt losses. However, since 37
periodic fluctuations in collection experience are a normal risk of
doing business, smart managers who have this responsibility will
arrange for credit lines with their banks in the event they cannot col-
lect what is due them in time to meet their obligations to their credi-
tors.A credit line is simply a promise by the bank to lend a company a
certain amount of money to tide it over until its customers pay their
bills.The company borrows however much it needs (within the credit
limits) whenever it needs it and repays the bank when it collects from
its customers. Interest is charged for only the time the amount bor-
rowed is in the company’s hands.

Inventory
Our next balance sheet item is inventory, a term used for pro-
duction materials or products purchased or products manufac-
tured and then held by the company for sale.
A company that manufactures its products might show sev-
eral categories of inventory, like those on Wonder Widget’s bal-
ance sheet:

• Raw materials—whatever the company uses in the manu-
facturing process, before it begins to change them into
something else. It might be whole logs for a sawmill or it
might be lumber for a company that makes furniture. The
amount on the balance sheet is the cost of these materi-
als, the amount paid to its suppliers to purchase them.
• Work in process—products in the midst of the manufac-
turing process, no longer raw materials but not yet fin-
ished goods. The balance sheet will include raw materials
costs as well as some labor and related costs applied to
these materials during the manufacturing process. You’ll
learn more about this process when we talk about cost
accounting in Chapter 8.
• Finished goods—fully manufactured products ready for
sale to customers. The balance sheet will show all the