Let's Get Down to Business...

Accounting and Finance: What do they really do all day?

Are Accounting and Finance just about the same thing?  What do those people working in Accounting do all day?  The Finance people seem to be sharper dressers and all drive BMWs, but what are they supposed to be doing?

Our week in the worlds of Accounting and Finance will try to answer (some of) those questions.  During your visit, you'll be introduced to lots of new terminology, even more than usual.  Because this material is new and very different from anything you've seen before, students have (occasionally) become frustrated.  Hint:  Flash cards work well for keeping all these new terms straight.

To help out, we'll shorten up the list of ratios to study.  There are just three to focus on:  (1) Current Ratio, (2) Debt/Equity Ratio and (3) Return-on-Equity Ratio.  We'll also add another financial report to know (the Statement of Cash Flows), but you'll see that studying it will be almost as exciting as reading a New York Times best-seller.

The continuation page has some more helpful hints, but to get started, here are my lecture notes and PowerPoint slides:

• Download Week 4 - Accounting and Finance

Getting Right with your Ratios

Calculating the "Big Three" financial ratios is only half the fun. 

The real excitement doesn't start until you're using them to solve a mystery.  Calculating a ratio is like uncovering a new clue.  Your job is to study all the clues and figure out why something is happening. 

Calculating ratios and using them to solve financial mysteries is something you'll do in the real world.  From them, you'll get strategic insights about your own company and its competitors.  Then you can plot how you'll exploit your competitive advantage to the detriment of those competitors.

You might also use ratio analysis to figure out whether a new customer or supplier will be a good one.  Or you might study some ratios as part of deciding whether to accept a company's job offer.  Nothing would be worse than landing your dream job only to have your employer go bankrupt in six months.

So, let's look at some of the things you'll want to know and how ratio analysis can be a "tool" for getting the answers.

Your Study Guide for the Fourth Week

Time flies when you're having fun, right?  Here's your Study Guide for the Week you've been waiting for - Accounting and Finance Week! 

What do all those numbers mean?  Are they all accurate and reliable?  How can they be useful?

We'll try to answer most of those questions this week.

You need to know something about accounting as you get ready to launch your business career.  Why is it important?  It's how they keep score!  How can you win if you don't know the score?  Download Fourth Week Study Guide

Keep an Eye on those Cash Flows

As you've learned, the Statement of Cash Flows often provides more useful information than the Income Statement or Balance Sheet.  Cash is the lifeblood of a business; there's nothing more essential. 

The Statement of Cash Flows reports the sources (incoming) and uses (outgoing) of a firm's cash.  It gives you an inside look at how well the firm's operations are running, where its cash is coming from and where it's being spent.  It shows how changes in a firm's Income Statement and Balance Sheet effected its cash.

"B" is NOT the Correct Answer

As you're dutifully working through the Self-Test questions at the end of Chapter 15, the textbook's answer to Multiple Choice Question #24 should stump you.

The question asks for the term that describes the noncash process of allocating an asset's historical cost (purchase price) over its useful, economic life to account for wear and tear, deterioration or obsolescence. 

The textbook says the correct answer is "B" - Gross Profit.  That's wrong. 

The correct answer is "D" - Depreciation. 

Bank Loans to Small Businesses: What do they look like?

The financial resources for starting small businesses historically come from equal parts of founder investments and borrowed funds. 

Commercial banks are the dominant source of credit, providing a majority of the equipment financing and lines of credit used by small businesses.

But what are the characteristics of bank loans to small businesses?  Typically, how much is borrowed and how are they repaid?  Is collateral required?  Do the terms vary depending on the loan's purpose?

Wells Fargo Bank is the nation's largest small business lender where small business loans are defined as being less than $100,000.  As of year-end 2006, they had committed over 820,000 loans with an average loan size of $26,000, a grand total of over $18 billion.

The following two tables describe Wells Fargo Bank's terms and conditions for the two principal loan types used by small businesses, a line-of-credit and equipment financing.

Feedback - Give it early and often

It's important that we communicate with one another about how you're doing in the course.  All too often, evaluations come at the end of a course when it's too late to make mid-course corrections.

How about doing things different and maybe better?

Here's a link to a Confidential Survey where you can give me some feedback on what's working or not working for you:  Click to Give Feedback

Your feedback is confidential.  I'm the only one who will see it.  Access to your feedback is password protected.

Your feedback can also be anonymous if you want.  If you want me to contact you, or know who you are, leave your name and how to contact you.  Otherwise, your feedback will be anonymous if you want it to be.

Let me know early and often how things are going.  Thanks for your help.