John Tennent - The Economist guide to financial management

GUIDE TO FINANCIAL MANAGEMENT

Guide to Analysing Companies

Guide to Business Modelling

Guide to Business Planning

Guide to Cash Management

Guide to Commodities

Guide to Decision Making

Guide to Economic Indicators

Guide to the European Union

Guide to Financial Markets

Guide to Hedge Funds

Guide to Investment Strategy

Guide to Management Ideas and Gurus

Guide to Managing Growth

Guide to Organisation Design

Guide to Project Management

Guide to Supply Chain Management

Numbers Guide

Style Guide

Book of Business Quotations

Book of Isms

Book of Obituaries

Brands and Branding

Business Consulting

Business Strategy

Buying Professional Services

Doing Business in China

Economics

Emerging Markets

Managing Uncertainty

Marketing

Managing Uncertainty

Megachange the world in 2050

Modern Warfare, Intelligence and Deterrence

Organisation Culture

Successful Strategy Execution

The World of Business

Directors: an AZ Guide

Economics: an AZ Guide

Investment: an AZ Guide

Negotiation: an AZ Guide

Pocket World in Figures

John Tennent

THE ECONOMIST IN ASSOCIATION WITH PROFILE BOOKS LTD

Published by Profile Books Ltd
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Copyright The Economist Newspaper Ltd, 2008, 2013
Text copyright John Tennent, 2008, 2013

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book.

The greatest care has been taken in compiling this book. However, no responsibility can be accepted by the publishers or compilers for the accuracy of the information presented.

Where opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of The Economist Newspaper.

While every effort has been made to contact copyright-holders of material produced or cited in this book, in the case of those it has not been possible to contact successfully, the author and publishers will be glad to make amendments in further editions.

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Hardback 978 1 78125 205 5
Paperback 978 1 78125 206 2
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EFFECTIVE FINANCIAL MANAGEMENT is essential for a business to succeed; many have failed for want of it. All too often a career aspiration falters, not for lack of effort or ability in a chosen field, but for not being able to understand the financial impacts of decisions and ultimately a failure to deliver the numbers. Managers who find themselves in a senior role unable to ask questions of others which might imply their own ignorance have wished that they had got to grips with really understanding financial matters earlier in their career.

This guide to financial management is designed to take you through financial principles and illustrate their application, providing a toolkit for managing financial responsibilities. Each chapter is written from an operational perspective in establishing and running a business. Before the index is a glossary of the financial terms used in the book. There is also a list of companies used in examples. The names are those in existence at the time of writing; merger and acquisition activity will inevitably change this.

All books are not just the work of the author but the results of contributions of many others. I am grateful to clients and colleagues who provided the opportunity to explore aspects of business, complete research and develop my thinking. In particular I would like to thank my colleagues at Corporate Edge for their insights and contributions, and Mandy Aston for her work on the original script and many of the diagrams; Mike Samuel for his support and the time he dedicated to reviewing and commenting upon the first edition; Nick Insall for his review of this edition; and Profile Books for the help they gave me, particularly Stephen Brough, Penny Williams and Jonathan Harley.

Special thanks to my wife, Angela, and my two sons, William and George, who have supported my enthusiasm for writing, even on holidays. Also to my parents, particularly my father, a chartered accountant, who always encouraged my career, and gave me the passion and interest in business.

I would welcome feedback and can be contacted on the following e-mail address: John-Tennent@CorporateEdge.co.uk

John Tennent
May 2013

EVERY ENTREPRENEUR ASPIRES to create a successful business and investors certainly want management to run successful businesses. So what determines whether a business is being successful? Before answering this question it is helpful to define what a business is and the various forms it can take.

A business is a commercial operation that provides products or services with the aim of making a profit for the benefit of its owners. The significant point is for the benefit of its owners, which differentiates it from a government or not-for-profit organisation, such as a charity, where the activity is conducted for the benefit of the people it serves.

A profit is an essential element of running a successful business. It is a trading surplus whereby the revenues earned exceed the costs. This surplus belongs to the owners of the business to use as they choose: to take for themselves, to reinvest back in the business, or a mixture of the two. For a government organisation or charity any surplus is reinvested in the activities to further benefit the people it serves.

A business can take many forms ranging from a sole trader to a large multinational company. The principal aim of making a profit for its owners is still the same.

A person starting out and setting up a business will take all the risk and reward as the venture gets under way. As the business grows it can be advantageous to share the risk with others and separate the business activities from those of the owner by establishing a company.

A company is a legal entity in its own right that is separate from its owners. An investor is risking only the money paid for buying some shares in the company. If the company ceases trading, the shareholders (owners) are not liable to make up any shortfall between the value of the companys assets and its liabilities.

There are five broad categories of business: