Home > Articles

Introduction to How to Keep Score in Business: Accounting and Financial Analysis for the Non-Accountant, 2nd Edition

📄 Contents

  1. The First Lesson: Scores Are Not Real Dollars
  2. The Accrual Method
  3. But Scores Are Important
Robert Follett introduces his book, which will teach you the fundamentals of keeping score in business.
This chapter is from the book

The purpose of this book is to teach you the fundamentals of keeping score in business. You will learn the basic workings of the accounting system. When you are through, you will be able to read, understand, discuss, and use a balance sheet, an income statement, and other statements found in financial reports. You will know something about various tools for analyzing financial reports and investment opportunities. You will have a basic vocabulary of the important terms used in accounting. You will be able to talk with more confidence to accountants, auditors, financial analysts, budget directors, controllers, treasurers, bankers, brokers, and lots of other people who use accounting jargon.

This book will not make you an accountant. But it will help you talk with accountants. This book will not teach you to keep the books for a company. But it will help you understand the financial reports produced by bookkeepers and accountants.

This is a book for non-accountants. It was written by a non-accountant. This book aims to make you successful in business despite your lack of formal accounting education or experience.

To get the most out of this book, you need three things. You need to keep paper and pencil beside you as you read. You need a calculator (or a good head for computation). Any cheap, simple calculator that can add, subtract, multiply, and divide will do. If you don't have one, I strongly recommend that you get one. Finally, you will need some time to get the most out of this book.

This is not a long book. But it will repay close attention. Some of the concepts are confusing. Some of the computations are a bit complex. There is nothing here that a good high school student cannot understand and handle. But it will take time. The time you spend will be repaid with a basic understanding of business accounting.

The title of this book is How to Keep Score in Business. In business, the score is kept in dollars. The system of accounting provides the rules for keeping score. Some people don't understand keeping score in football. They get mixed up about touchdowns, safeties, field goals, and points after. And when there is talk of the number of sacks, percentage completions, and yards per carry, they go blank.

A lot of people don't understand keeping score in business. They get mixed up about profits, assets, cash flow, and return on investment. Discounted cash flow, current ratio, and book value per share leave them blank. This book fills in some of the blanks.

Knowing how to keep score in business is essential to moving up in management. That's why seminars on accounting and finance for nonfinancial managers are among the most popular. That's why courses on this topic are offered at hundreds of colleges and continuing-education centers. That's why hundreds of books have been published on this topic.

However, most of the seminars, courses, and books suffer from one major problem.

They are put together by accountants.

Most accountants know too much to explain the business scorekeeping system to the non-accountant.

I am not an accountant. I started my business career in sales. Then I had a lot to do with product development. I was the president of a large company. I became chairman of an even larger company. Along the way I had to learn about financial accounting the hard way. I have worked with accountants, auditors, bankers, treasurers, and controllers. These experts often flimflammed me with accounting lingo I didn't understand. I was made to look like a fool because somebody with an accounting degree exposed my ignorance. I've made almost every dumb mistake that a manager with no financial or accounting background can make.

But over many years in business I finally learned something about the accounting system. Now I can keep score along with the best. I don't know everything. But I know enough to be a good manager who can use financial information.

If you study this book carefully, I'll give you many years of hard knocks and dumb mistakes distilled into a relatively few pages. When you're finished studying this book, you will be well on your way to mastering an indispensable management skill. You will know the basic system for keeping score in business. You will understand the major elements of financial accounting.

Here is how the rest of the book is organized:

In the remainder of this chapter you will learn why this book is about keeping score. You will see that accounting scores are not the same as spendable dollars. This key concept will underlie much of the rest of the book.

Chapter 2 is a glossary of key financial terms. Here you will find definitions of the key words and phrases most often used by accountants. These are practical definitions that will help you develop the essential vocabulary you need for communication. You will want to refer to this glossary often—as you use the rest of the book and later, when you deal with accountants and financial reports.

Chapter 3 introduces you to the balance sheet. This is a statement of a company's financial position at one point in time. It is a basic financial report. In this chapter you will invest in the Acme Widget Company.

Chapter 4 tells more about the balance sheet. It gives you insight into what is shown and what is not shown. You will learn some useful methods of analyzing balance sheet information. Some valuable information never appears on any financial report. This will be discussed in this chapter.

Chapter 5 completes the presentation on the balance sheet. When you are finished with this chapter, you will have completed the most difficult part of the book—difficult because it introduces you to many new concepts and ideas. These will make it much easier for you to handle the chapters that follow. Then you will be better able to handle real-life experiences with financial reports.

We turn to the income statement in Chapter 6. This financial report summarizes a company's operations over a period of time. The last line of the income statement is the famous "bottom line." You will learn what income statements show and what they hide. Various ways of analyzing income statements are introduced. A brief section shows the reconciliation between the income statement and the balance sheet—how they connect.

Chapter 7 discusses return on investment. Several methods of computing return on investment are presented. Return on investment is an excellent way to evaluate company performance or analyze possible investments or acquisitions. You will learn how to use this tool.

The statement of changes in financial position is presented and analyzed in Chapter 8. Using this statement will help you see how funds flow into, through, and out of a company. It reveals some of the things that are not too clear on the balance sheet or income statement.

Chapter 9 teaches you one method of making a cash flow budget. This is an especially valuable management tool. With it you can plan ahead and avoid the embarrassment of running out of cash, even when sales are good. (It can happen.)

Chapter 10 introduces a variety of other analysis ratios and tools. Some are valuable to managers, others to lenders, and still others to investors. I will caution you about the limitations of these ratios and tools. No substitute has yet been devised for common sense.

What will you have learned when you finish this book? Chapter 11 is the summary chapter. It briefly recaps all the major ideas presented in the preceding ten chapters.

This book has no pinup pictures. But it does have a lot of figures. You will find many of them in the tables and illustrations and in the Appendixes. Appendix A summarizes the most important details of Acme Widget Company. Appendix B is a table of present values. You will learn how to use this valuable analysis tool in Chapter 7. You will want to use it frequently thereafter. The book ends with an index, where you can quickly look up things as you work with financial reports and accountants.

Have fun! Number crunching and massaging of figures can be an enjoyable pastime, even if you have no formal training. This book should give you enough information so that you can crunch and massage with anyone.

The First Lesson: Scores Are Not Real Dollars

Basically, accounting is simple. Lots of people are accountants who aren't as smart as you are. Of course, the Internal Revenue Service, the Financial Accounting Standards Board, the Securities and Exchange Commission, and other organizations have made a basically simple system more complicated. To be a good manager you need to know only the basics. Let's begin with the most basic of basics—the bottom line.

When people talk about the bottom line, they usually mean the last line of an income statement, which is labeled "Net Profit After Taxes" or "Net Income." This is the amount of money a business has to spend, right?

Wrong! Dead wrong.

The bottom line, net profit after taxes, is just a score. The business may have many more actual dollars to spend than the bottom-line figure shows. Or it may have a lot fewer dollars to spend. The bottom line is a score. Don't confuse the score with real money. For a long time I did. This led to a lot of dumb mistakes.

Learn this lesson, and learn it well. The numbers you see on financial reports are scores in the game of business. They usually do not represent real, spendable dollars. In the remainder of this book you will be shown why this is so. You will also see how to figure out how many real spendable dollars a business has or is likely to have in the future.

Let's carry this further. You get a sales report. It shows the number of dollars of sales. Can the money from these sales be spent? No! In most businesses, sales figures are scores. The actual money will be unavailable until later, when the customers pay their bills.

You get a purchasing report. It shows how many dollars worth of goods have been purchased and put into stock. Does that mean those dollars are spent and gone? No! In most businesses this is a score. The actual dollars are not paid to the suppliers of the goods until sometime later.

And so it goes with most financial reports. These reports show scores. Scores are not the same thing as real, spendable dollars.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020