Skillbook

Finance Management
Bite-Sized Scenario Training™
Finance Management
Skillbook

This workbook is published by:

Emerald Works
Level 1
50 Frederick Street
Edinburgh
EH2 1EX
U.K.

Copyright © Emerald Works 2011-2020.

All rights reserved.Emerald Works Limited (Company Number

SC202102, VAT Number: GB 665 3593 06) is a company registered
in Scotland.

Version H1.0

This workbook is protected by international copyright law. You

may use it only if you are a member of the MindTools Club™ or
have received it under corporate license. If you have any queries,
please contact us at members.helpdesk@mindtools.com. Please
contact copyright@emerald.com if you’ve received this from any
other source.

Cover image © GettyImages/baona

Contents

1. Introduction 1

2. Finance Management and Why It’s Important 2

3. The 10 Fundamental Functions of Finance 4

4. Essential Financial Terms 11

5. Key Financial Reports 16

6. Key Points 22
Answers and Templates 23

Finance Management Skillbook | Mind Tools iii

1. Introduction

The world of finance can be a mysterious and

complex one, particularly if you have little or
no experience of it.
If you sometimes feel intimidated So, in this skillbook, we’ll help you
by financial reports filled with to understand more about basic
tightly packed rows of numbers and finance management.
complex graphs, don’t worry – you’re
Over the next hour you’ll:
not alone. In many organizations,
managers outside the finance • Discover what finance
department don’t need to know management really entails
every single fact and figure. However, and why it’s necessary to
a good, basic grasp of finance is your organization.
important whatever your career and • Find out more about the roles
when you make big life decisions, too. and responsibilities of your
finance team.
Finance management is about much
• Learn about key financial terms
more than controlling the flow of
and reports that organizations
money. A good understanding of
use, what they tell you and why
what your finance team does, as well
they are important.
as the key reports they produce and
what they can tell you, can help you
to make better financial decisions
that benefit both your team and your
wider organization.
And, if you think about it, these
decisions aren’t just down to the
people working in the finance
department. In fact they are made
every day by anyone who is
managing a budget or setting up a
new project. or who wants to make a
new investment.

Finance Management Skillbook | Mind Tools 1

2. Finance Management and Why It’s Important

Financial management is the reporting,

allocation, acquisition, and utilization
of financial resources to support a
business’ strategy.
Note that the definition above Finance management is not an
doesn’t mention “profit.” Financial isolated function, nor is it the
decisions are, in fact, based sole responsibility of the financial
upon the organization’s strategic controllers in your organization.
direction, and its desire to grow and If, for example, you’re a manager or
remain competitive. This strategy is part of your role involves managing a
commonly set by the shareholders budget, sound finance management
and investors, as it is their resources skills will help you to identify
that are being deployed. areas where your organization or
department is performing well, and
Organizational strategy could, of where it is not; as well as where
course, be about driving profit, but savings could be made or where
it could also be about using profit to further investment is needed.
invest and build a brand portfolio or Not only will this help you to make
enter new markets. good business decisions, but it will
also mean that you are doing your
Specifically, finance management part to secure the long-term financial
involves some or all of the following: health of your organization.
• Analyzing the financial situation,
internally and externally.
• Making financial decisions.
• Setting financial goals
and objectives.
• Developing financing plans.
• Providing effective finance
systems and processes.
• Seeking value through cost
savings and efficiencies.

Finance Management Skillbook | Mind Tools 2

 Action
Thinking about what we’ve
learned so far about finance
management, write down three
reasons why you believe it’s
important in your organization.

Why Is Finance Management Important in My Organization?

Action
Now, think about your role
and how it relates to finance
management of your organization.
Then, answer the following
two questions.

What Decisions Do I Make That Are Related to Finance Management?

How Will Understanding More About Finance Management Help Me to Perform Better?

Finance Management Skillbook | Mind Tools 3

3. The 10 Fundamental Functions of Finance

The finance department’s main purpose is

to provide financial expertise across your
business and ensure that a business achieves
its key financial goals
The size of your finance department
will depend on the size of your Action
organization. Senior managers in your
Think about the finance
finance team may have different titles, department in your organization.
such as Chief Financial Officer (CFO), Write down what you think
Treasurer, Controller (or Comptroller), its top 10 responsibilities and
or Finance Manager. functions are.
Once you’ve done this, check how
The larger your organization, the your answers compare with the 10
more likely it will be to have specialist key functions of finance that we’ve
financial functions, such as investment listed on page 6. Did you get any
managers, risk managers or taxation wrong? Or miss any out?
specialists. But, if yours is a smaller
organization, people will likely
have broader responsibilities that
encompass many different areas
of finance.

The people who work in the finance

department will be involved in
almost every business decision that
your organization makes – from
setting financial goals and budgets,
to advising on investments and
managing risks.

Finance Management Skillbook | Mind Tools 4

Top 10 Functions of the Finance Department

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Finance Management Skillbook | Mind Tools 5

The 10 Fundamental comparisons can be made
Functions of Finance between companies.
These reports are often audited
Whether your organization is a large externally (unless an exemption
corporation or a small business, exists). Audits ensure that
your finance department will likely stakeholders can have trust in and
be responsible for the following 10 rely on the numbers that have been
key functions: produced and that they depict
a true picture of the company’s
1. Creating budgets and financial health.
budget forecasts.
2. Producing statutory financial
reports and statements.
3. Preparing management Top Tip
accounts.
4. Cash flow monitoring Audit exemptions exist for some
businesses, but these can vary
and treasury.
depending on the country that you
5. Developing and managing
live in. For example, in the U.K.,
secure financial systems. an exemption occurs if a business
6. Managing financial transactions. has fewer than 50 employees or
7. Paying taxes. a turnover below £10.2m). In the
8. Advising on corporate U.S., only public companies have to
objectives and be audited.
organizational strategy.
9. Advising and deciding on
investment decisions.
10. Business partnering.
3. Producing Management
Accounts
1. Creating Budgets and This includes preparing weekly or
Budget Forecasts monthly financial statements for
Essentially this involves setting internal reporting purposes only.
expectations for the year, and These types of accounts may focus on
forecasting likely profit and cash flow. financial performance, as well as other
Board members can then establish key performance indicators (KPIs), and
what needs to be achieved in the year allows an organization to monitor its
ahead, what investments are needed, progress over time.
and what dividends are anticipated.
It also enables stakeholders to see
2. Producing Statutory how the actual figures are comparing
Financial Reports to those budgeted, and can help
them to decide whether their financial
Formal financial reporting is objectives are still sensible or whether
not only critical in enabling key they need to be reforecast.
stakeholders to assess organizational
performance, but it’s also necessary
to meet mandatory reporting and
accounting standards, too. This is
important to ensure that meaningful

Finance Management Skillbook | Mind Tools 6

4. Cash Flow and Treasury
Action
This refers to the process of
monitoring, analyzing and optimizing Secure financial systems are
the cash flow (or working capital) in essential in detecting and
an organization. This means ensuring preventing fraud and ensuring
that sufficient and appropriate compliance in any business. But
financing is in place so that the what does “fraud” entail?
organization can pay its employees Use the spaces below to write
and suppliers. down five types of fraudulent
activity that a company risks
If a company is doing particularly well allowing if it doesn’t have effective
and has a high cash flow, this can also finance management systems
be re-invested into the business. For in place. (Find our answers on
example, to pay off loans or finance page 21).
new projects.
To monitor cash flow effectively,
companies draw up Cash Flow
Five Types of Fraud Risk That
Statements (see page 19)
Could Impact an Organization
5. Developing and Managing
Secure Financial Systems
Financial management systems (FMS)
refers to the software and processes
an organization uses to manage
assets, income and expenses.
These systems ensure that there is
a rigorous control environment in
place that:
• Reduces accounting errors.
• Maintains auditing trails.
• Detects and prevents
fraudulent activity.
• Ensures compliance with
accounting standards.
Larger organizations, which are
audited more frequently and where
the need for rigorous financial
risk management systems is
higher, tend to have an internal
audit department dedicated to
managing and monitoring FMS, and
ensuring compliance.

Finance Management Skillbook | Mind Tools 7

6. Managing Financial maintaining financial efficiency
Transactions and reducing waste.
• Managing and assessing
One of the key day-to-day risks – identifying, analyzing
responsibilities of any finance and mitigating risks
department is to ensure that financial involved in investment and
transactions are completed smoothly, budgeting decisions.
efficiently and on time. • Monitoring the external
These types of financial transactions environment – identifying
may include: changes in the market and the
wider financial environment, and
• Payments to suppliers ensuring that the organization is
• Payments from clients prepared for any such changes.
and customers.
• Payroll processing. 9. Advising and Deciding on
• Expense claims. Investment Decisions
7. Paying Taxes Investment decisions relate to how
much an organization should invest,
Tax laws vary from place to place, and what specific assets it should
and they can be highly complex. But, invest in. These types of decisions
wherever there is a government, may include:
there are no doubt taxes to be paid!
• Capital budgeting: deciding
So, it’s vital that correct systems are in whether projects are
place that enable an organization to worth developing from a
file and pay its taxes correctly. financial perspective.
• Valuing investments: using
8. Advising on Corporate
present value, opportunity cost
Objectives and of capital, and future value,
Organizational Strategy to make sure that money is
well spent.
This refers to managing and using • Assessing project risks:
the company’s finances to help it this involves identifying and
achieve its goals and objectives, managing any financial risks
and to maximize shareholder value involved, as well as potential
over time. It involves continuously payoff, and establishing whether
monitoring, analyzing and readjusting it is likely to return enough of a
goals to keep the company focused profit to justify the risk.
on its long-term strategy. • Identifying assets: particularly
those that are worth more than
Some of the more common elements they cost, and which give a
of this function include: sufficient return on that cost.
• Ethical decision making:
• Planning: defining specific
many companies seek to
objectives, writing business
align profits with principles,
plans, and identifying and
which means seeking out
quantifying potential resources.
investment opportunities that
• Budgeting: setting specific,
are sustainable and ethical. For
departmental budgets that
example, those that focus on the
help the organization to meet
environment or climate change.
its wider objectives, while

Finance Management Skillbook | Mind Tools 8

 Action
Think about the different types of investment decisions that an organization
can make. Now, write down any key investment decisions that you know your
organization has made in the past year, in the space provided below.
For example, has it acquired another business or expanded into a new market?
If you don’t know of any, write down who you could ask or where you could go
to find out more about the investments your organization has made, as well as
any acquisitons or pension funds.

Investment Decisions I Know About

Where Could I Go or Who Could I Ask to Find Out More About the Following?

Investments

Acquisitions

Pensions

Finance Management Skillbook | Mind Tools 9

10. Business Partnering
Top Tip
Business partners work closely with
leaders across the business to provide Business cases are essentially
them with sound financial advice on project proposals, designed to
formally document the advantages,
business activities, business cases,
disadvantages, costs, risks, and
and organizational strategy. This could benefits of a particular project
include advice on budget setting, or investment. Finance business
forecasting, business-case planning, partners are pivotal in helping
and investment appraisal, for example. senior managers to draw up
accurate business cases that
Business partnering enables include the correct financial data
teams from across the business to needed to demonstrate the return
of a project or investment.
collaborate with internal finance
professionals who often have a better
“top-down” view of the organization,
its strategy and goals, and how best to
meet them. In the next chapter, we’ll look at the
key financial terms that are used by
In this way, corporate objectives organizations to monitor and manage
can be effectively linked to performance and profitability.
departmental, and even individual,
goals, thus ensuring a more purpose-
driven organization.

Financial business partners can

also help senior managers across
the business to draw up effective
and informed business cases that
contain all the critical financial
information needed.

Finance Management Skillbook | Mind Tools 10

4. Essential Financial Terms

Financial jargon can feel impenetrable at times.

There’s the opex, capex and EBITDA... if you’re
left scratching your head, don’t worry!
In this chapter, we’ll explain the key
financial terms you’ll need to know Top Tip
to gain a better understanding of
your company’s financial health. You Sales invoicing can sometimes be
different from “Earned Income.”
can also use them to help you to
For instance, in the case of
make informed financial decisions subscription services.
and to manage your budgets
more effectively. For example, if a client takes out an
annual subscription to a cloud tech
service, it may be invoiced upfront
Turnover, Revenue for the full amount – $24k. But the
and Sales revenue is actually recognized over
the life of that licence. This means
Often the terms “turnover,” “revenue” only $2k will count as revenue in
and “sales” (or “earned income”) are the first month, even though sales
all used interchangeably. It’s true invoicing is reported as $24k.
that turnover and revenue mean the
same thing. However, sales refers
to the money a business earns from
the sale of its goods and services;
while revenue (or turnover) is the
total amount of money generated by
a company. This means that revenue
can be higher than sales if a business
has other sources of income. Sales is
therefore a subset of revenue.
In this instance, revenue is a good
indicator of a company’s ability
to invest and allocate financial
resources; while sales indicates
the company’s capability to sell its
products and services.

Finance Management Skillbook | Mind Tools 11

EBITDA and Profit To calculate EBITDA you simply take
revenue, then subtract direct costs
EBITDA is a very common term used (e.g. machinery or plant costs) and
in accounting. It stands for: “Earnings, overheads (e.g. staff salaries or office
Before Interest, Tax, Depreciation rental costs). Then you add back any
and Amortisation.” depreciation, amortization, interest
and tax included in your overheads.
The EBITDA margin is another useful
Top Tip measure that businesses like to look
Amortization and depreciation are at. This is EBITDA as a percentage of
two ways of calculating an asset’s turnover. This measure is useful as
value over time. it allows businesses to make year-
on-year comparisons. For example,
Amortization is the spreading of
EBITDA might go up one year, but
an intangible asset’s cost over that
the EBITDA margin might decrease.
assets’ useful life. Intangible assets
might include a patent, a copyright This is an indicator that the business
or a franchise. is working less efficiently than in
the previous year and management
Depreciation is the expensing of will want to understand why that is
a fixed or tangible asset over its
– perhaps costs or expenses have
useful life. This might include assets
such as computer equipment or
increased recently, resulting in a
office furniture. lower EBITDA margin.

Accruals and Prepayments

Put simply, EBITDA can be thought You “accrue” an expense or cost
of as a measure of a company’s when your business has received
operating performance. a product or service but hasn’t yet
Because EBITDA ignores the received an invoice for it. Recording
impacts of non-operating factors, costs can help businesses to keep
such as financing decisions (loans track of expenses over time.
and interest), accounting decisions Prepayments are the opposite of
and policies (depreciation and accruals – where the business
amortization) or tax deductions, it has paid upfront for a product
can give a much clearer insight into a or service that it hasn’t yet
company’s actual profitability. received. For example, an annual
subscription payment.

EBITDA Formula CAPEX and OPEX

EBITDA = Any expense that a business incurs is
classified under two headings:
Revenue - Direct Costs - Overheads
1. Capital (or investment)
expenditure (CAPEX).
2. Operating expenditure (OPEX).

Finance Management Skillbook | Mind Tools 12

Capital expenditure refers to business NPV (Net Present Value)
purchases of major goods and
services that will be used to improve NPV refers to the present value of
the company’s performance over the cash flows at the required rate of
long term. This might include: return of your project, compared to
your initial investment (or cash outlay).
• Property.
• Plant or machinery. The term “present value” is based on
• Computers. the fact that a dollar today is worth
• Vehicles or trucks. more than a dollar tomorrow. Why?
Because a business can invest that
These expenditures depreciate over money and start earning interest on
time, which means that the cost of the it immediately.
asset is spread out over the term of
its “useful life.” For example, a laptop This means that the investments an
might have a useful life of three years, organization makes today should,
which means that a computer costing in theory, produce more revenue in
£1,800 would depreciate to zero at a the future. The present value tells
rate of £50 per month for that term. us how much our future income will
be in today’s dollars. It does this by
In contrast, operating expenditure accounting for the “time value of
(OPEX) relates to costs that a money” (denoted by t in the formula
business incurs from running its day- given below).
to-day operations.
NPV can be very useful in financial
Operating costs might include:
planning, as it can help businesses to
• Staff salaries. work out what its return on investment
• Printing costs. will be on a particular project
• Travel costs. or expenditure.
• Rent and utilities.
• Staff training.
NPV Formula
OPEX are usually short term.
The economic benefits of the NPV = Rt - Initial Investment
expenditure generally occurs within (1 + i)t
the accounting period (month
where:
or year) in which the costs were
reported, which is why they are Rt = net cash flow at time (t)
recognized immediately. i = discount rate
t = time of the cash flow
NPV, IRR and Paybacks
When a business needs to decide IRR (Internal Rate of Return)
what budgets to set or whether to
invest in a particular project, it will The Internal Rate of Return is another
often look at a range of measures good measure for determining the
that can help it to assess whether potential payoff of an investment.
the project will be worthwhile or not. It is a percentage “interest rate” that
In these instances, the company makes the NPV of all cash flows
will likely look at one of these equal zero. In other words, it is the
three measures: rate of growth that an investment is
expected to generate.

Finance Management Skillbook | Mind Tools 13

If this sounds tricky to calculate, don’t A company has a negative working
worry! Fortunately, most spreadsheet capital if the ratio of current assets to
apps and scientific calculators can current liabilities is less than one. If
work out IRR for you, using built- this is the case, it will likely struggle
in formulae. to grow and may have problems
paying off its creditors. It may even
Paybacks go bankrupt.
In financial planning, payback When a company has a positive
essentially refers to the amount working capital, however, it’s in a
of time before a cash investment much better position to fund its day-
is recouped. Shorter paybacks to-day activities and invest in future
would therefore be more desirable projects that can help drive growth.
to investors. A company might, for
example, make it a requirement that
projects have a payback of 5 years or
less. Any longer and the project gets Action
automatically rejected.
Now it’s time to test
One of the key benefits of using your knowledge!
this measure is its simplicity,
because you’re basically asking, On the following page are a list of
some of the financial terms we’ve
“When am I likely to see a return on
just covered. Without looking
my investment?”
back, write down a short definition
However, there are some risks of each in one or two sentences,
involved in using this measure. First, using the spaces provided.
unlike NPV and IRR, it doesn’t account
for the time value of money. And,
second, it could cause companies to
only focus on projects with a quicker
return and neglect those that have
a slower return but a significantly
higher payoff.

Working Capital
Working capital (also known
as net working capital or NWC)
is the difference between a
company’s current assets and its
current liabilities.
It’s a good measure of a company’s
liquidity - in other words its short-term
financial health.

Finance Management Skillbook | Mind Tools 14

 Financial Term Definition

Turnover (or Revenue)

Prepayments

Opex (Operating Expenditure)

Net Present Value (NPV)

Working Capital

You’ll most likely see the terms

we’ve discussed in this chapter in
your company’s monthly or annual
financial reports. So, in the next
chapter, we’ll take a look at the main
types of financial report you’ll need to
know and what they can tell us about
organizational performance.

Finance Management Skillbook | Mind Tools 15

4. Key Financial Reports

Financial reports can feel inscrutable. There

are all those tightly-packed lines of figures and
percentages. How are you supposed to make
sense of them all? What do they all mean?
Every organization needs to account 1. The Profit and Loss
for the money that it brings in and the Account (or Income
money that it spends. This can help it
Statement)
to understand more about its financial
performance over time, how it should The P&L Account (also known as the
plan for the future, and what goals it Income Statement) summarizes a
should set. company’s revenue, costs and profit
This statement shows you whether
That is why financial reporting is so the income of an organization is
important. So, in this chapter, we’ll greater than its costs. In other words,
look at the different types of financial whether it’s profitable or not.
reports you’ll likely come across, how
An example of a P&L account for a
to decipher them, and what each can
fictional firm, Classy Clothes Co. Inc.,
tell you about your organization’s can be found on the following page.
financial health. The three key You can also prepare your own P&L
financial reports we’ll cover are: account using the template provided
on page 24.
1. Profit and Loss Account (or
Income Statement).
2. Balance Sheet.
3. Cash Flow Statement.
The three financial reports listed
above all have a different focus,
though there are links between them.
This means it’s often necessary to
look through all three of them to
build up a true picture of the financial
health of an organization.

Finance Management Skillbook | Mind Tools 16

Example P&L Account for Classy Clothes Co. Inc.

12 Months Ending December 31, 2019 December 31, 2020

($000) ($000)
Turnover
Sales of Clothes and Footwear 600 650
Other Income 50 60
Revenues From Design Consultancy Services 250 350
Total turnover 900 1,060
Direct Costs
Sales Commission (40)* (45)
Cost of Goods Sold (COGS) (200) (230)
Total Direct Costs (240) (275)

Gross Profit (Turnover - Direct Costs) 660 785

Gross Profit Margin (Gross Profit as a % of Turnover) 73.3% 74.1%

Overheads (Fixed Costs)

Wages (300) (350)
Office Rental (50) (60)
Marketing (20) (25)
Technology (15) (15)
Other (10) (10)
Depreciation and Amortization (8) (10)
Interest 1 2
Total (402) (468)

Profit Before Tax (Gross Profit - Overheads) 258 317

Tax (49) (60)
Profit After Tax (PBT - Tax) 209 257

EBITDA (Profit - Adjusted Overheads, excl. Depreciation, Amortization 455 570

and Interest)
EBITDA Margin (EBITDA as a % of Turnover) 50.5% 53.8%
*Please note in financial reporting, costs are typically shown as negative figures denoted by brackets ().

Finance Management Skillbook | Mind Tools 17

Balance Sheet
The Balance Sheet provides a • Current liabilities – money
snapshot of the financial viability of an that the company owes to
organization. It does this by showing outside suppliers, such as as
all of its assets and liabilities, what it utility bills, rent and salaries.
owes and what it’s owed, as well as Current liabilities are short-term
money invested by shareholders. liabilities owed within one year
(long-term liabilities are due at
The types of assets and liabilities
any point after one year).
typically included on a balance • Long-term liabilities – these
sheet are: can include long-term debt,
• Current (short-term) assets – pension fund liabilities and
these can be easily converted to deferred tax liabilities (taxes that
cash within one year (if needed). have been accrued but won’t be
They include things like paid for another year).
amounts owing from customers, Suppose the owners of a business
prepaid expenses and inventory invest $100,000 and place all the
(goods available for sale). cash in the bank. On day one, the
• Long-term assets – these aren’t company’s Balance Sheet would look
able to be liquidated within the like this:
next year. They can include
long-term investments, property
and machinery.

Example of a Balance Sheet: Year One

Assets $(000) Equities $(000)

Cash at bank 100 Owners’ equity 100

Now suppose that after one year, the • The business owes creditors
business position is as follows: $75,000 (a liability that it will
need to pay out by the end of
• Cash at the bank has increased the year).
to $400 due to a bank loan • The company has also taken out
achieved on the strength of a a bank loan of $500,000, but
business plan. this is not due for repayment for
• The business owns an inventory 5 years (therefore this is a long-
of stock worth $100,000 term liability).
(current assets). • During the year, the business
• The business has sold goods has made a profit of $105,000.
and is currently awaiting a This is added to the owners’
payment of $150,000 from equity. Similarly, any loss would
debtors (also an asset). have been deducted from
• It has also invested in some their equity.
new machines costing $50,000.
After depreciation over the year,
their value is $40,000. (They are
considered tangible assets, as
they are physical in nature).

Finance Management Skillbook | Mind Tools 18

Following these changes, the However, if this figure were
company’s balance sheet now looks negative, there would be significant
very different (see table, below). concern that the company would be
unable to meet its repayment and
As you can see, the company has
operating obligations without raising
a working capital of $575,000. As
additional funding or disposing of its
this is positive, it suggests that the
fixed assets.
company’s short-term financial health
is good because it has sufficient You can draw up your own Balance
liquidity to pay its short-term bills Sheet using the template on page 26.
and finance internal investment
for growth.
Example of a Balance Sheet: Year Two
Assets ($000) Equities ($000)

Fixed Assets Owners’ Equity 10

Tangible 40 Profit for Year 105

Total Fixed Assets 40

Current Assets

Cash at Bank 400

Stock 100

Debtors 150

Total Current Assets 650

Current Liabilities

Owed to Suppliers (50)

Payroll Taxes Due (25)

Total Current Liabilities (75)

Long-Term Liabilities

Bank Loan (500)

Net Assets 115

(Total Fixed Assets + Total Current Assets -
(Current Liabilities + Creditors Due After One
Year))
Working Capital 575 Total Equity 115
(Current Assets - Current Liabilities)

Finance Management Skillbook | Mind Tools 19

Cash Flow Statement
Top Tip
The Cash Flow Statement (or
Statement of Cash Flows) shows Cash flow is very different from
the actual cash flow in and out of profit. For example, a large
an organization. This is important transactional amount may be
because one of the key aims in counted as revenue as soon as an
invoice is sent out to a customer, but
any business is to create value for
the actual cash from this deal may
shareholders, which is determined by not be received for several months
having a positive cash flow. (depending on contract terms).
Positive cash flow indicates that
a company is able to add to its
cash reserves, which it can use to
reinvest in the business, pay out
money to shareholders or settle
debts. A positive cash flow therefore
demonstrates that a business has
strong financial flexibility. Not only
does this put the company in a
better position to reinvest and grow,
it also means it’s better equipped
to survive economic downturns or
market instability.
On a Cash Flow statement, cash
flow is segmented into three
different areas:
• Operating cash flow: all cash
generated by a company’s
regular business activities.
• Investing cash flow: cash
generated or spent on
investment activities, such as
the purchase or sale of assets
and securities.
• Financing cash flow: all
proceeds gained from issuing
debt, equity and dividends, as
well as capital lease obligations.
See page 21 for an example of a Cash
Flow Statement for Classy Clothes
Co. Inc., (profit figures are based on
those given in the P&L account shown
on page 17).
If you want to create your own Cash
Flow Statement, you can use the
template on page 27.

Finance Management Skillbook | Mind Tools 20

Example Cash Flow Statement for Classy Clothes Co. Inc.

December 31, 2019 December 31, 2020

(£000) (£000)
Cash Flow From Operating Activities

Profit Before Tax 258 317

Net interest (1) (2)

Operating Profit 257 315

Depreciation and Amortization 8 10

Working Capital Movements 50 60

Net Cash Generated From Operating Activities 315 385

Investing Cash Flow

Investments in Property and Equipment (30) (45)

Total Cash Used in Investing Activities (30) (45)

Financing Cash Flow

Issuance (Repayment) of Debt 0 (100)

Issuance (Repayment) of Equity 0 0

Total Cash From Financing 0 (100)

Net Increase/(Decrease) in Cash 285 240

(Total Operating Cash - Total Cash From Investing - Total Cash
From Financing)
Opening Cash Balance 250 535

Closing Cash Balance 535 775

Finance Management Skillbook | Mind Tools 21

5. Key Points

Finance management is key to understanding

an organization’s performance. But it’s not only
about the “bottom line.”
Ultimately finance management is what enables and drives organizational
strategy. It helps us to make informed decisions about the budgets and goals
that we should set, or investments we should and shouldn’t back.

It’s also key to increasing the value and profitability of an organization, and
ensuring that it is able to fulfil its financial obligations. For example, paying staff
and suppliers on time, as well as dividends to investors.

That is why it’s so important that you have a good, basic understanding of what
the finance department does, as well as the key responsibilities it has, and the
financial terms and reports it uses. This knowledge can help us to build up a
better picture of how organization is performing, where it can do better and
where it’s heading in the future.

Finance Management Skillbook | Mind Tools 22

Answers and Templates

Answers to Exercise (page 7)

Types of Financial Fraud Risk That Can Affect an Organization

Embezzlement (also known The misuse of funds by the people who control them. For example, an
as larceny) accountant who uses their client’s money for their own personal needs.

Embezzlers might also create bills or receipts for activities that did not
occur to disguise the transfer of funds to themselves as legitimate (this
is also known as “skimming”).

Ponzi schemes are a type of embezzlement. In these schemes, the

embezzler scams investors by using assets they’ve been entrusted with
for the purposes of investment for their own personal use. To maintain
the fraud, the embezzler often needs to seek out new investors to
appease prior investors.
Internal Theft This involves the stealing of organizational assets by employees. It
could include taking offices supplies or products that the company
produces without paying for them.

One key indicator of internal theft is a drop in inventory, which is why

controls such as regular inventory audits are so important.
Corruption This entails dishonest behavior by managers or those in positions of
power. It can include the giving or taking of bribes or inappropriate gifts,
double-dealing or insider trading, diverting funds, money laundering, or
defrauding investors.

If unchecked, corruption can lead to increased criminal activity or

organized crime. Many businesses work to prevent corruption through
internal training on bribery and ethics, strict reporting procedures
(for example, to monitor the receipt of corporate gifts), and by doing
background checks on employees.
Money Laundering The illegal process of “clearing” large sums of money through criminal
activity (such as people or drug trafficking, or terrorist funding) by
making it appear that such money came from a legitimate source.

Finance Management Skillbook | Mind Tools 23

Types of Financial Fraud Risk That Can Affect an Organization Cont.

Bribery (also known as An illegal payment made to an employee to give preferential treatment
“payoffs” or “kickbacks”) or other inappropriate services in return. The bribe could be a gift,
money, credit, or anything else of value.

Bribes also interfere with the employee’s ability to make an unbiased

decision and can severely harm an organization’s reputation.
Extortion The use of violence, threats or intimidation to gain money from an
employee or an organization.

Blackmail is a form of extortion, and ransomware (a type of malware

that threatens to steal or sell personal data if a ransom is not paid) is a
growing form of it.
Counterfeiting This involves the manufacturing and distribution of goods under an
organization’s brand name, without their permission.

Counterfeit goods are often made at a lower quality than the original
so that they can be sold cheaply. It can also be responsible for child or
slave labor, and organized crime.

Counterfeiting can have a severe impact on the legitimate

organization’s reputation, as well as its sales and profits.

Finance Management Skillbook | Mind Tools 24

Template: Profit and Loss Account (Income Statement)

12 Months Ending Year Ending Year Ending

($000) ($000)
Turnover

Total turnover

Direct Costs

Total direct costs

Gross Profit
(Turnover - Direct Costs)
Gross Profit Margin
(Profit as a % of Turnover)

Adjusted Overhead Costs

Wages

Total

Profit Before Tax

(Gross Profit - Overheads)
Tax

Profit After Tax

(Profit Before Tax - Tax)
EBITDA
(Profit - Adjusted Overheads excluding Depreciation,
Amortization and Interest)
EBITDA Margin
(EBITDA as a % of Turnover)

Finance Management Skillbook | Mind Tools 25

Template: Balance Sheet
Assets ($000) Equities ($000)

Fixed Assets Owners’ equity

Tangible Profit for year

Intangible

Total Fixed Assets

Current Assets

Cash at bank

Stock

Debtors

Total Current Assets

Current Liabilities

Owed to suppliers

Payroll taxes due

Total current liabilities

Long-Term Liabilities

Bank loans

Net Assets
(Total Fixed Assets + Total
Current Assets - (Current
Liabilities + Creditors Due
After One Year))

Working Capital Total Equity

(Current Assets - Current
Liabilities)

Finance Management Skillbook | Mind Tools 26

Template: Cash Flow Statement

Year Ending: Year Ending:

(£000) (£000)
Cash Flow from Operating
Activities
Profit before tax

Net interest

Operating Profit

Depreciation and amortization

Working capital investments

Net cash generated from operating

activities

Investing Cash Flow

Investments in property and

equipment

Total cash from investing

Financing Cash Flow

Issuance (repayment) of debt

Issuance (repayment) of equity

Total cash from financing

Net Increase/(Decrease) in Cash

(Total Operating Cash - Total Cash From
Investing - Total Cash From Financing)
Opening Cash Balance

Closing Cash Balance

Finance Management Skillbook | Mind Tools 27