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Terminology used in this book
A principal barrier to understanding finance, never mind strategy, is the terminology used by finance folk. Not only does terminology change between countries but it also develops over time. New and updated standards with new terminology are being continually developed and issued, converging between countries and jurisdictions wherever possible.
Owing to US pre-eminence in commerce and financial markets, there is a natural tendency to adopt US terminology: obvious examples are United Kingdom - stocks, United States - inventories; and United Kingdom - gearing, United States - leverage.
This book defines and explains the current (and other contemporary) terminology commonly used in the United States and United Kingdom with reminders of alternative terms where deemed appropriate. The inescapable point is that wherever you are based and whatever statements you are perusing, you will be faced with different terms; one essential skill to learn is to be bi- if not multi-lingual with respect to accountants' speak.
In a similar vein, there are several conventions as regards sign, that is, expressing numbers as positive or negative. The fundamental bookkeeping convention is that there are the two signs, debit and credit (+ or -), but as explained in Chapter 4 these take on a different guise when they are used in the balance sheet compared to when they are used in the income statement. In the balance sheet (statement of financial position) a debit or debtor is an asset - in everyday language, a good thing to have - and generally will be unsigned or without brackets ( ). Whereas a liability, a credit, or better, a creditor, is not a nice thing to have: people do not like having debts - see how confusing accountants can be! Liabilities in the balance sheet are often shown bracketed or possibly with a minus sign.
The thinking behind debits and credits switches through 180 degrees when used in the income statement or profit and loss (P&L) account; that is, amounts arising from income or sales are 'good' and recorded as credits and normally unsigned and un-bracketed. Whereas expenses, while inevitably necessary, are 'bad' and may be signed minus, although in fact the most common convention is to leave them unsigned as with income, leaving you the reader to understand that costs are the opposite of sales -not too deep!
I hope you are now clear? The practical problem is that different conventions are used and you will have to comprehend them when looking at any financial statements or management reports. Throughout this book I use a range of common terminology and sign conventions that you may meet, with the intended purpose that you will not be at all fazed by whatever is put in front of you. We accountants can be somewhat maverick; an example I once faced when given a report by a management accountant was:
the -3,000 being in red! What could this mean? Well, in my view it is a quadruple negative, but when asked why he had been so thorough with sign convention the accountant replied, T am trying to be helpful.' Amen to that.
There is a glossary of terms where synonyms are given along with an indication of the currently 'popular' favorite word.
Structure of the chapters
Introduction to the accounting statement/topics
Links between the statement/topics and financial strategy
'Within this chapter we will cover the following topics:'
Order and logic - to aid putting the subject into context and how it relates to financial strategy
The body of the text
Conclusion - the important lessons and strategic links in the chapter Revision and learning pointers
How you might use this book
The aim of the book is to enable executives to understand all aspects of finance, particularly how finance reveals all types of business strategies and how they may be implemented, tracked and modelled, and therefore the book can be read from beginning to end. However, you may have an urgent need to understand some aspect of accounting, reporting or finance and therefore you can turn to the chapter or chapters that address your needs.
Most chapters have revision and learning pointers which are aimed at reinforcing your understanding. There are also web links to assist you further.
The analytical and computational spreadsheets are available for download from koganpage.com/editions/executive-finance-and-strategy/ 9780749471507
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