Chapter 14. How Business Managers Use a Financial Report

In This Chapter

• Recognizing the limits of external financial statements

• Locating detailed financial condition information

• Identifying more in-depth profit information

• Looking for additional cash flow information

If you're a business manager, I strongly suggest that you read Chapter 13 before continuing with this one. Chapter 13 discusses how a business's lenders and investors read its financial reports. These stakeholders are entitled to regular financial reports so they can determine whether the business is making good use of their money. The chapter explains key ratios that the external stakeholders can use for interpreting the financial condition and profit performance of a business.

Business managers should understand the financial statement ratios in Chapter 13. Every ratio does double duty; it's useful to business lenders and investors and equally useful to business managers. For example, the profit ratio and return on assets ratio are extraordinarily important to both the external stakeholders and the managers of a business — the first measures the profit yield from sales revenue, and the second measures profit on the assets employed by the business.

But as important as they are, the external financial statements do not provide all the accounting information that managers need to plan and control the financial affairs of a business. Managers need additional information. Managers who look no further than the external financial statements are being very shortsighted — they don't have all the information they need to do their jobs. The accounts reported in external financial statements are like the table of contents of a book; each account is like a chapter title. Managers need to do more than skim chapter titles. As the radio personality Paul Harvey would say, managers need to look at the rest of the story.

This chapter looks behind the accounts reported in the external financial statements. I explain the types of additional accounting information that managers need in order to control financial condition and performance, and to plan the financial future of a business.