ACC/400 Accounting for Decision Making
ACC/400 Week Three
Business Operations
Introduction
I work at an organization that never pays a dividend but retains all earnings for plant expansion and growth. Are they hurting the stock price? Wouldn’t they be better off paying a divided? Why would anyone invest in a company that has never, and will not, pay any money out? After all, I am not getting any return on my money so why should I invest?
The question posed above is trickier than most realize. All organizations are managed and directed under different sets of principles and goals. Many are concerned with overall profitability and maintaining stock value. Many are concerned with growth and its ability to compete in the global economy. It is not that one strategy is superior to the other, it is simply a philosophical difference in what and how to maintain, grow, and compete.
With that said, a generic model to business operations is hard to describe. Take for example General Electric (GE). For many years, under the watchful eye of Jack Welch, GE strived to be top dog in all of its divisions. If after a few years (or months) it was apparent they were not able to compete at the highest level, they would sell or liquidate the division. This philosophy proved to be very profitable as GE has risen to the highest levels of the Fortune 500. Use caution though, as this approach or management style is not for everyone.
This Week in Relation to the Course
Week Three discusses in great detail how to evaluate the profitability of an organization utilizing various approaches. These include:
1. Sustainable income (i.e. sources of income)
2. Comparative analysis
3. Ratio analysis
4. Quality of earnings
The profitability of an organization is based upon its ability to meet the needs of the customer, finance its activities, and effectively manage cash. Do this, and more times than not you will be successful.
How Readings Solidify Concepts
Accounting students are in short supply. More specifically, students that continue to question generally accepted procedures, and the answers those procedures produce, are becoming even more rare. Financial analysis and business analysis are one in the same. To be an effective manager, whether that is in marketing, operations, or accounting, the need to understand the basic tenants of the financial statements is paramount.
The chapters required for reading this week illustrate how businesses are traditionally reviewed, why they are reviewed, and many ways to accomplish this. A core understanding of analysis, in the financial sense, will be the result of Week Three’s required reading.
Practical Application and Questions for Thought
Consider the analysis techniques employed by Warren Buffet, CEO of Berkshire Hathaway. Mr. Buffet, one of the wealthiest investor’s in America, utilizes many non-traditional methods of analysis. His investing technique is based upon the theoretical premise of a famous economist, Benjamin Graham. Graham’s theory is that the most value can be attained from companies who are currently under valued, thus, they are most likely to outperform the market in the shortest amount of time. The question is, however, what is the definition of under valued and HOW do you know that?
Mr. Buffet does not worry about the stock market or believe in the efficient market theory. What he does believe in is the businesses ability, as a whole, to generate cash flow into the future. Granted, Mr. Buffet does utilize many of the traditional techniques discussed in the readings. He does this, however, with a minimal staff and no computers (or so we are told).
The current ratio for my organization is very low in relation to the industry average. What does this mean and why?
During the course of the year my organization changed its methodology for recognizing sales revenue. What was the driver, why would an organization do this, and what is the effect on the financials?
Summary to Encourage Learning
After this week, you will better understand how the operations of various organizations are run, what is important, and what is not important. The main things to remember are the various techniques for analyzing the financial condition of an organization. What each technique lacks is the personal touch. Never underestimate the intuitive, or “gut” feeling you have when analyzing an organization. More times than not, your initial thoughts on the overall profitability and longevity turn out to be true.
References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2007). Financial accounting: Tools for business decision making (4th ed.). Hoboken, New Jersey: John Wiley & Sons.
Schroeder, R.G., Clark, M.W., & Cathey, J.M. (2005). Financial Accounting Theory and Analysis (8th Ed.). Hoboken, New Jersey: John Wiley & Sons.
Williams, J.R., Haka, S.F., & Bettner, M.S. (2005). Financial and Managerial Accounting (13th ed.). New York, NY: McGraw-Hill Companies.
Fleet, W., Summers, J., & Smith, B. (2006). Communication Skills Handbook for Accounting (2nd ed.). Milton, Qld 4064: John Wiley & Sons.
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