Financial Measures and Management Practices New Business

¶ … Financial Measures and Management Practices

New business leaders, aspiring entrepreneurs and even experienced professionals are all confronted with a bewildering array of financial measures that are commonly used to reflect how well companies are performing. Moreover, there are a number of management tools that are available that can be used to evaluate these financial measures provided that the practitioner understands what they mean and how they can be used. To this end, this paper provides a review of the relevant juried and scholarly literature concerning various financial measures and management practices, followed by a summary of the research and important findings in the conclusion.

Review and Discussion

How do stock prices and dividends reflect the value of the firm?

Although they are not infallible of course, stock prices provide a general reflection of the fundamental value of a firm that includes the present discounted value of future firm earnings (Carlstrom, Fuerst & Ioannidou, 2002). By contrast, the payment of stock dividends reflects value in a firm because these "represent distributions paid out by the company to stockholders based on the outstanding shares (issued shares less treasury shares)" (Siegel & Shim, 2001, p. 152).

What does a statement of cash flows tell us about the short- and long-term prospects of the firm?

While cash flows are continuous and "the action never stops," statements of cash flow provide a periodic "snapshot" of how much money is being spent and where it is going. In this regard, Siciliano (2003) reports that, "There is a continuous flow of action captured in the company's income statement and its statement of cash flow. Accountants provide an income statement and statement of cash flow adding up the changes that happened during the month-long activity, and a balance sheet that shows where everything was on the last day of the month" (p. 19).

How does an outside review use a statement of cash flows and other financial statements to assess the viability of the firm?

Because all investors are not equally informed concerning a firm's financial viability, cash flows and other financial statements provide a means of ensuring the fiscal health of the firm (Carlstrom et al., 2002). Among other financial indicators, financial analysts frequently include the following in their assessment of firm viability:

1. Current cost (this is the amount of cash or equivalent that would have to be paid if the same or an equivalent asset were acquired currently);

2. Current market value;

3. Net realizable value; and,

4. Present value of future cash flows (Powers, 1999, p. 231).

Why is cost accounting so important to the success of the firm?

This term means "The gathering and processing of cost information for external reporting and internal decision-making" (Shafritz, 1998, p. 549). This definition, though, was not always accurate because cost accounting was originally focused strictly on formulating calculations of financial performance for external reporting purposes; however, increasingly, businesses are using cost accounting for identifying and measuring costs for internal decision-making purposes as well (Shafritz, 1998).

What are the various methods of cost accounting and how are they used?

A wide range of cost-capturing methods are used in cost accounting, including some subjective and intangible costs that remain controversial. For instance, according to Shafritz, "The new perspective emphasizes costs beyond those that have been traditionally captured within the cost accounting system. In addition to traditional cost information, there is recognition of long- and short-run costs that may be more broadly defined as psychic costs and social costs" (p. 549)..

How does an operating budget work to discipline a firm's management?

Corporate managers can become profligate in their practices if they are not constrained by placing realistic limits on their expenditures and operating costs (Siegel & Shim, 2001).

What are the elements of a budget?

According to Siegel and Shim (2001), "A comprehensive budget is a formal statement of management's expectations regarding sales, expenses, volume, and other financial transactions of an organization for the coming period. Simply put, a budget is a set of projected financial statements" (p. 60).

How are budgets constructed?

The budget construction process will be unique for every firm, and will range from the extremely casual such as a sole proprietor "ball-parking" budget needs to the extremely sophisticated that require ongoing input from all cost departments (pers. obs.).

What is budget variance?

As the term implies, a budget variance is a difference between what is planned and what is realized and this variance can be positive or negative, and calculating such variances is one of the fundamental purposes of a budget. For instance, Siegel and Shim report that, "A budget is a tool for both planning and control. At the beginning of the period, the budget is a plan or standard. At the end of the period, it serves as a control device to help management measure its performance against the plan so that future performance may be improved" (2001, p. 60). Therefore, properly administered, budgets can help business leaders identify weaknesses in performance areas and opportunities for improvement, as well as strong areas that can be built upon for future success.

What is management accounting?

According to Hoskin and Macve (2000), management accounting is "any form of accounting which enables business to be conducted more efficiently" (p. 92). The definition of management accountants provided by Keong (1999) indicates that these professionals are "responsible for collecting, processing and reporting information that will help managers in their planning, controlling, and decision-making activities; the management accounting role is a vital support function for the entire management structure and is the main information-generating system within an organisation" (p. 15).

What are the sources of data?

As noted above, the type of data that are needed by individual management accountants depends on the unique needs of their organizations, and it is reasonable to suggest that no two practitioners would approach the same problem in the same fashion, making management accounting an art rather than a science. In this regard, Keong emphasizes that, "Management accounting is a multi-disciplinary subject consisting of some elements of business, management, and scientific methods such as EOQ, statistical theories and the arts approach like intuition, judgmental analysis and so on" (1999, p. 15). Some other sources of data used by management accountants include cash, accounts receivable, marketable securities, inventory items, as well as other items of machinery and equipment, many of which are highly subjective in valuation (Keong, 1999).