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Welcome to financial accounting

Financial management is the art of putting together information for the business to allow it and external parties to make decisions based how well the business is externally operating. Financial accounting works with both financial management (the activity of managing a business’ finances/money) and management accounting that looks to account for the internal operations of a business cost.

The Three Basics of Financial Management

1. Investment – how the business borrows money (a business itself has no wealth as it is owned by the business owners). Where it gets its money from, what terms the money is borrowed and returned, what rules or governance the business takes on borrowing money. All money borrowed is a liability that needs to be paid back either in the short term or long term.
2. Spend – tracking how money is spent in terms of cash, buying things (assets), and money owed (accounts receivable). The spending of money and the wealth that is generated from it is tracked and reported by the 3 fundamental financial reports: Cash Flow Statement, Income Statement and, Balance Sheet.
3. Business owner Payment – allocating wealth (profits) generated by the business to business owners. In limited or incorporated businesses business owners are equity shareholders who are paid a dividend when agreed by the business managers.

3 Fundamental Financial Reports

Financial management can get complicated and scary for two main reasons:

1. Discipline – if you are running a business you have to – have to – keep track of your (or someone else’s) money. This requires discipline to keep receipts, invoice on time, and accurately record financial transactions when they happen. Many people in employment don’t need to do this as they get paid for the work they do. However, a business manager needs to be on top of this all of the time otherwise two things can go missing – 1) money, 2) opportunity – the two things you need to sustain and grow a business.
2. Mathematics – many people that run a business don’t like the working with the numbers as they are not used to or confident in using mathematics (maths). However much you don’t like “the detail” understanding numbers is vital to know what’s going on and what decisions to make. The good news is that the maths is simple – addition, subtracting and then getting more complicated with division and multiplication for ratios.

These two factors have to address and accepted when running a business even if that means giving the job of managing accounts to someone else in the form of a real person like an accountant or bookkeeper.

Balance Sheet

Cash Flow Statement

Income Statement