The Finance Manual for Non-Financial Managers: Become a Confident User of Financial Information (Smarter Solutions: the Finance Pack)

321 Pages·1999·1.16 MB·English

by  Paul Mckeon

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The Finance Manual
for Non-Financial
Managers
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About the Authors
PAUL MCKOENis a Fellow of the Chartered Institute of
Management Accountants. After reading a finance
degree, he joined Ford Motor Company where he
spent eleven years in a variety of roles. Now Finance
Director of Vertex, the Business Process Outsourcing
company created by United Utilities, he is based in
Cheshire.
This is his first book and is inspired by all those
marketing, operational and engineering managers who have patiently
shared their technical expertise in exchange for help with financial
issues.
LEO GOUGH is a financial journalist. His other
books include How the Stock Market Really Works and
Offshore Investment.
The Institute of Management (IM) is at the forefront of management
development and best management practice. The Institute embraces
all levels of management from students to chief executives. It
provides a unique portfolio of services for all managers, enabling
them to develop skills and achieve management excellence.
If you would like to hear more about the benefits of membership,
please write to Department P, Institute of Management, Cottingham
Road, Corby NN17 1TT.
This series is commissioned by the Institute of Management
Foundation.
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SMARTER SOLUTIONS
The finance pack
The Finance Manual
for Non-Financial
Managers
The power to make confident financial decisions
PAUL McKOEN and LEO GOUGH
London • New York • Toronto • Sydney • Tokyo • Singapore
Madrid • Mexico City • Munich • Paris
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PEARSON EDUCATION LIMITED
Head Office:
Edinburgh Gate
Harlow CM20 2JE
Tel: [phone]
Fax: [phone]
London Office:
128 Long Acre
London WC2E 9AN
Tel: [phone]
Fax: [phone]
www.business-minds.com
First published in Great Britain 1997
© Pearson Education Limited 2000
The right of Paul McKoen and Leo Gough to be identified as Authors of this Work has been asserted
by them in accordance with the Copyright, Designs, and Patents Act 1988.
ISBN 0 273 64493 9
British Library Cataloguing in Publication Data
ACIP catalogue record for this book can be obtained from the British Library.
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic,mechanical, photocopying, recording, or
otherwise without either the prior written permission of the Publishers or a licence permitting
restricted copyingin the United Kingdom issued by the Copyright Licensing Agency Ltd,
90 Tottenham Court Road, London W1P 0LP. This book may not be lent, resold, hired out or otherwise
disposed of by way of trade in any form of binding or cover other than that in which it is published,
without the prior consent of the Publishers.
10 9 8 7 6 5 4 3
Typeset by Northern Phototypesetting Co. Ltd, Bolton
Printed and bound in Great Britain by Bookcraft, Midsomer Norton
The Publishers’ policy is to use paper manufactured from sustainable forests.
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Contents
1 Reporting to the outside world 1
Company background 1
The framework 3
The report 5
The financial statements 6
The profit and loss account 8
The balance sheet 13
The cash flow statement 19
Published accounts and the stock market 21
2 Analysing accounts 27
Analysing company accounts 27
Ratio analysis 28
Applying ratios in credit control 36
Corporate governance 40
Auditors 43
3 The basics of accounting 51
Double entry bookkeeping – the debits and the credits 51
Accounting records 54
Basic principles 60
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CONTENTS
4 Accounting within the organisation 63
Internal versus external accounts 63
The control cycle 66
Structuring the plan 68
Making budgets effective 69
Cost centres 73
Profit centres 74
Measuring performance 78
5 Costing 87
Introduction 87
Cost – some definitions 88
Traditional (absorption) costing 92
Standard costing 94
Activity based costing 98
Sales versus inventory 101
Accounting for throughput 102
Costing – some general thoughts 103
6 Pricing 105
Introduction 105
Competitive position 107
Product revisions 109
Return on sales 110
The ‘Special Value Programme’ (SVP) 114
General points on pricing 118
7 Project analysis 119
What is project analysis? 119
The basic tools 122
Payback 122
Internal Rate of Return (IRR) and Discounted Cash Flow (DCF) 124
Some more advanced considerations 131
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CONTENTS
WACC – the Weighted Average Cost of Capital 134
Cashflows in perpetuity 136
8 Organisational control 139
Introduction 139
Internal control 142
Fraud – a general profile 144
Organisational control – whose responsibility? 146
9 Corporate taxation 151
Tax – a strategy 152
The main taxes on companies 154
Capital allowances 160
The taxation of multinationals 160
Double taxation treaties 161
Transfer pricing 162
Using offshore centres and tax havens 168
Holding companies in Holland 176
Company structure 179
Summary 183
10 Financing 185
The balance sheet 186
The cash flow cycle 188
Forms of financing 190
Overdrafts and loans 191
Bonds 194
Credit terms 198
Financing of specific assets 200
Equity financing 203
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CONTENTS
11 Acquisitions 211
Introduction 211
Acquisitions – the strategic view 212
What makes companies vulnerable to bids? 214
Accounting implications 218
Accounting policies 224
Bids and the stock market 227
12 Risk and risk management 235
Risk analysis 235
Environmental/strategic risk 236
Financial risk 239
The forward contract 242
Derivatives 246
Financial futures – hedging versus speculation 248
Other financial risks 249
Longer-term risk 250
The risk/reward relationship and the stock market 251
The ‘equity risk’ of a listed company 252
Conclusion 255
Appendix A Financial controls – who, where, when and how 257
Appendix B Some numerical tools 269
Appendix C The Greenbury report 285
Appendix D Present value tables 289
Glossary 291
Index 299
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The MCI Middle
If you are studying for one of the NVQs on which the MCI standards are based, this book
can help. Here’s how some of the topics in this book relate to particular units.
Middle Management Standards
Unit 1 Initiate and implement change and improvement in services, products
and systems
Chapter 4. Accounting withinthe organisation 63
Chapter 8. Organisational control 139
Element 1.1 Identify opportunities for improvements in services, products and systems
Chapter 4. Accounting withinthe organisation 63
Chapter 7. Project analysis 119
Element 1.2 Evaluate proposed changes for benefits and disadvantages
Chapter 7. Project analysis 119
Appendix B. Some numerical tools 269
Unit 2 Monitor, maintain and improve service and product delivery
Element 2.1 Establish and maintain the supply of resources into the organisation/
department
Chapter 5. Costing 87
Element 2.2 Establish and agree customer requirements
Chapter 6. Pricing 105
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