Even Scarier Than Halloween: Basics of Accounting and Finance | Technological Leadership Institute
I started writing this entry on October 31. All around Campus people are dressed in costume, looking forward to lots of candy and even a few good scares. But this was also the day our MOT 5001 class entered into something many people find even scarier than a Haunted House: Basics of Accounting and Finance!
Frankly, I continue to be shocked when engineers who have mastered mass balance become mystified when the subject turns to a balance sheet. The rules of accounting may seem counterintuitive at times, but they are clearly written down, and the resulting math can usually be done on a four-function calculator.
Granted, it can get pretty complex for large enterprises, and some of the rules are subject to interpretation. I appreciate the humility when a finance professional talks GAAP – Generally Accepted Accounting Practices. Even the words acknowledge these are not absolute laws of the universe, just ‘generally accepted’. Like so many fields, the ‘more you know, the more you realize you don’t know.’
Yet a scientist or engineer entering a business needs to recognize that financial results are a primary scorecard for any business. Knowing the language used in making decisions in a company is vital to having influence into those decisions. Personally, I focus on just the three main financial reports: Income statement, Balance Sheet, and Cash Flow.
The Income Statement is the most commonly used, and it goes by many names. Often called a “P&L” because it tells you whether you made a profit or a loss during the period, it is the running health check on your business. It can be done on a cash basis, but that doesn’t align the revenue and cost in the same periods, making it harder to determine the health of the ongoing business. So larger businesses use an accrual basis. Way harder to do the calculation, but when you get it right, you can get a far more accurate picture of the health of your business.
If you work for a large, established company, the income statement is likely the only one you need to know unless you work in the finance function, or are a senior company executive. This is the format used to consider business investments. What sales will result from a new idea? What are the investments needed to make the idea reality? What will the ongoing costs look like? How much profit can be made?
But if you work for a smaller company, or especially for a non-profit firm, the other two reports are especially important.
This blog is part of a 14-week series by TLI Senior Fellow and Honeywell/Edson W. Spencer Chair in Technology Management Steve Webster. Each post will focus on one concept or idea discussed in his course MOT 5001- Technological Business Fundamentals. Other posts in the series can be found here.