The chief executive of the worlds biggest mining company, BHP Billiton, said in October 2011 that companies should include in their performance measures the level of community acceptance of the way the company conducts itself. He said “We need affirmation from our communities that what we are doing is the right thing”.

An interesting idea for a company like BHP is that where they source their materials and labor can have a profound effect on the country itself. For example, going to a country that is relatively poor could bring benefits to the people of that country. Hence the company can contribute to the greater good.

More direct social responsibility measures include employee turnover rate – this can be used a measure of whether employees are proud to be associated with the company.

While most investment decisions will be based on financial performance, today companies are expected by their employees and communities to also be good citizens. A company will be wise to monitor their social responsibility achievements and to regard their community acceptance as an important asset – often as important as the assets shown on the balance sheet.

An organization should review its key growth achievements for the period and plan for future growth.

We give examples to help you review your own growth achievements, and to plan your short and long term growth plans.

Key growth achievements

Examples:

The company:

• recorded sales growth in its markets.
• launched its new product or service during the period.
• achieved significant market traction with the release of its new product or service into its key markets.
• posted its first sales into a new market.
• expanded its sales force.
• commissioned a new plant and commenced operations.
• obtained regulatory approvals for the operational license.
• established a joint venture company for the production of the new product.

Future growth

An organization should review its future growth strategies for the next year as well as future years (long term growth).

Examples:

The company intends to:

• Expand sales in its key markets by doubling the size of its sales-force in those markets.
• Develop the business by growing its presence in a new market.
• Expand the market by introducing new products and services.
• Investigate the potential of selling its products and services into new markets.

Long term growth outlook

Examples:

The company plans to:

• Launch a new product or service. Plan to capture a % share of the market.
• Develop new markets.
• Continue development of products and services.
• Investigate new opportunities for products and services.
• Focus on productivity improvement.
• Strengthen the business fundamentals.

To make a good decision, ask what financial and other information is relevant to making a choice. If you don’t have all the information, consider doing more research. Besides the financial implications, how will people be affected by your choice?

If you use consultants or other people in your organization to help you reach a decision, be aware that, although each may genuinely believe their suggestion to be superior, it is human nature for people to be biased in some way, sometimes unconsciously. The same applies to you! Be as objective as possible.

Each alternative is an opportunity. Each has a cost. Which is the one most likely to be beneficial?

See: Opportunity cost

• Historical – record of transactions that have taken place.
• Projecting (future) – shows the future financial picture of a budget.

Traditional business accounting is an historical record of the finances of a business over a period of time.  Examples:

• Revenue: What was the revenue amount achieved per month and for the year. What part of the revenue was received as cash and what part is still owing to the business? Who bought from the business, what did they buy, when did they buy and when did they pay? How did these transactions appear in the profit & loss or income statement, cash flow statement and balance sheet?
• Expenses: What were the expense amounts incurred per month and for the year.  How much of the expenses that were incurred have already been paid and what potion is still owed by the business? What were the expenses incurred by the business, when were they incurred and when were they paid for? All these transactions will be shown in the historical accounting records and will impact the income statement, balance sheet and cash flow statement.

There are two aspects to business accounting. The historical aspect which records transactions prior to a given date i.e.  have already taken place, and the budgeting and forecasting aspect which projects the financial picture of the business into the future.

Projections (“future” accounting)

In the same way as transactions that have already occurred are recorded in the accounts, the budget can be used to predict the financial statements that will be achieved in the future. What are future revenues and expenses; when will customers pay, and when will the business pay it suppliers? All the assumptions used to create a budget can be used to predict a future income statement, balance sheet and cash flow statement.

There are software programs available that facilitate creating the budget and using it to predict future financials. For a good example, see Visual Cash Focus.

Financial accounting

Financial accounting refers to the financial statements that are released to the public regularly. They are a record of the historical accounts of the business prepared according to generally accepted accounting principles. They show the financial position of the business.

They can be used to see how the business has performed over time and to assess if the business is in a sound financial position.

The main statements released publicly are the balance sheet and the income statement. A cash flow statement is also usually included. A management report (e.g the annual report) is also provided.

Management will have a set of financials that they use internally, but when the information is released to the public, it must be presented using the standard generally accepted accounting principles.

Accounting defined

“Accounting” is the recording and reporting of the financials of an entity. It exists to provide information internally to management and staff and externally to interested parties.

Accounting principles

The generally accepted accounting principles define assets, liabilities, expenses and income in business accounting. These principles also define when these can be recognized to ensure consistency, relevance, reliability and understandability. They provide rules for drawing up the financial statements and accompanying notes. The financial statements specified include the income statement, balance sheet and cash flow statement. The objective is to provide a set of reports to the public that fairly represent the financial state and performance of the reporting entity. They should be prepared in a consistent way across reporting periods. Items should be fairly stated, neither under- or over-stated.

The accounting principles exist to give confidence to readers that financial reports and commentary are fair and just representation of the financial position of the reporting entity.

The traditional balance sheet has evolved over the years to fairly report the financial position of a business.  However, it is not great when you want to do financial analysis.

The ideal is to divide the balance sheet into two – those items that provide funding to the business (CASH, EQUITY, DEBT) on the one side, and those items that are used to run the business (WORKING CAPITAL and FIXED ASSETS) on the other.

To see how to accomplish that, see: Traditional versus financial.

To calculate financial performance, one needs to do financial statement analysis. Various techniques are available for this analysis, for example the DuPont model, Economic value added and NOPAT.

This website balancesheetwalk.com is particularly interested in the Financial Statement Links i.e. the way the financial statements are linked to each other. Understanding this helps with the financial analysis of an organization.

More information on all these techniques are available on this page: Financial performance. Look at each of the menu items on the left side of the page.