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What are the essentials of
finance and accounting?
For me the essentials of finance and accounting
for a business is found in the information that
it provides to management that allows them
to make the best and most accurate, informed
decisions about the financial assets under their
control.
At its core, the finance and accounting system
answers the following vital questions that go
to the very survival of the enterprise:
1. Are we currently profitable? Does the business
continue to have the capacity to endure and
which way is the profit trending? ... Answered
by last month’s operating profit compared
with previous months and displayed on the
Profit & Loss Statements created by the ac-
counting system.
2. Can we pay our bills as they fall due? Can the
business remain solvent into the near future
and avoid litigation and loss of essential re-
source supply? ... Answered by the cashflow
forecast produced by analyzing the Profit and
Loss Statement and changes to the Balance
Sheet created by the accounting system.
3. What is the financial strength of the business?
What is its net worth and how much value
has the business created for the owners? ...
Answered by the value of the owner’s equity
section of the Balance Sheet.
After answering these vital questions, the
finance and accounting system digs even
deeper and provides management with more
targeted information by providing:
• An analysis of the liquidity of the business
that uses ratios like the current and quick
ratio taken from the Balance Sheet to
measure how quickly a company can con-
vert assets into cash to meet its immediate
financial obligations
• An analysis of the profitability of the busi-
ness that uses ratios like return on assets
or equity taken from the Profit and Loss
Statement and Balance Sheet to meas-
ure the growth and level of profitability in
relation to a company’s assets, sales and
shareholder investment.
• An analysis of the capital structure of the
business that uses ratios like debt to eq-
uity and interest times cover taken from
the Profit and Loss Statement and Balance
Sheet to measure the business’ reliance on
debt funds and its ability to meet the obli-
gations of those debt funds
• An analysis of the efficiency of the man-
agement of the business that uses ratios
like assets, accounts receivable and in-
ventory turnover taken from the Profit
and Loss Statement and Balance Sheet to
measure the performance of the compa-
ny’s executives in relation to the efficient
management of the assets under their
control.
• An analysis of the capital market value of
the business that uses ratios like Price/
earnings and dividend yield taken from
the Profit and Loss Statement, Balance
Sheet and Stock Exchanges to measure
the value of a company’s shares/stock
from an investor’s point of view.
This information is for me is the essential in-
formation required for successful business
management and is delivered exclusively by
the finance and accounting system
- Peter Baskerville
