Page 71 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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and loss (P&L) statement, statement of income and expenses,
and a few others.
Whatever you call it, it’s usually acknowledged to be the
most important report a company produces. (But hold your
vote until you’ve read Chapter 6.) As such, it behooves us to
spend a little time understanding how it comes together, and
why that matters.
While non-financial people readily recognize the importance
of the income statement, they don’t always appreciate how
transaction timing affects profit in any given period. In fact,
they’re often surprised that monthly reports don’t show the
effects of individual transactions that they reasonably expected
to see, even though nothing has been missed or been reported
incorrectly. There are two culprits in this plot:

• The passage of time between the date a transaction was
first committed to a supplier or a customer and—through
the processes of fulfillment, invoicing or billing, and
recording—the date payment was made or received.
• The confusion that sometimes arises over when a transac-
tion should properly be recorded, under the accounting
rules. (Remember GAAP from Chapter 1?)
Regarding the first culprit, time, there’s often a long
sequence of events that must be completed before a transaction
may be recorded. The final step of a transaction can be record-
ed days or even weeks after the initiating department has fin-
ished its role in the process, e.g., filling the customer’s order. It
might be even longer before the transaction is complete, e.g.,
the company collects from the customer.
As for the second culprit, confusion, I can recall one typical
incident when I was the controller for a large company with a
nationwide sales organization. A regional sales manager with
budget responsibilities questioned a financial report that showed
expenditures charged to his department in June, when he had
made the deal with the supplier to provide the merchandise or
services in April. “Why wasn’t it taken out of my budget in April
when I spent the money?” he asked.