An Overview of What an Organization Will Value

There are many, many types of organizations around the world. Organizations may be publicly held (that is, they sell stock, or portions of ownership, to the general public), or they may be privately held. They may be gigantic or very small, for profit or nonprofit. Organizations may be within the government, provide education, or sell commercial products or other services.

The industries that these organizations serve are equally varied. The organization may be a manufacturing company, but what it manufactures can vary from food to automobiles. It may provide services, but those services may be as different as computer repair services or dry cleaning.

In the United States, accountants are required to follow generally accepted accounting principles (GAAP) when preparing financial statements, but, even so, this article cannot provide a complete understanding of all of the variations possible for every organization.

Important The goal of these examples is to introduce you to the language, framework, and the most common types of financial issues that senior managers face. These examples can impart an understanding of how you, as a WLP professional, help drive the desired financial outcomes within a organization. This article relies upon basic examples suitable for either a simple manufacturing or service situation. As you read these examples, allow your creativity to play with how the same concepts can be applied for your unique organization. You can learn more about basic finance by reading the finance articles listed in the Additional Resources section in the back of this article.

Depth of Detail

The depth of financial information available to you will differ depending on whether you are internal or external to your target organization. Other than what is required by law to be published, financial information is usually treated very confidentially. Many readers, such as OD directors, instructional designers, or on-staff instructors, have access to internal memos, white papers, intranets, and management financial reports. Management financial reports are more detailed versions of public financial reports, plus additional reports that allow managers within an organization to monitor their daily operations and take informed action. Financial statements prepared for external publication are less detailed on the theory that it is best not to tell your competition too much about how you are running your day-to-day operations.

Profit

The starting point in this analysis of value is the organization’s profit performance. Profit is measured by adding incoming revenue and subtracting outgoing expenses within a specified period of time. Profit is shown on a report known as the income statement or the profit and loss statement.

Many people believe that if an organization is making a profit, it must be doing well. Not necessarily! An organization may be making a profit, but how it does so defines the stability of its business position. The dot.com bubble taught many people the value of managing position.

Position

Position is the mix of the assets and liabilities of an organization. An organization that is too heavily in debt, versus other methods of funding to make a profit, is at a high risk of being unable to withstand adverse business conditions. Such an organization is said to be highly leveraged, that is, to be carrying far too much debt versus the amount of assets on hand available to pay back that debt if it should suddenly need to do so, given a greatly reduced revenue stream.

Individuals know that if they have reached the limit on their credit cards and then lose their job, they could be forced into bankruptcy to resolve money problems. Such individuals have borrowed a great deal, assuming that future income would cover their debt. Unfortunately, because of the loss of a job, they are unable to pay the debt back or to get more debt to cover expenses.

Organizations can get into the same situation. Managing position means maintaining the appropriate mix of the assets, liabilities, and owner’s equity of the organization. Assets are items such as cash or things that can be converted to cash in the short or long term. Liabilities are short- and long-term debts. Owner’s equity, also known as shareholder’s equity, is the ownership claims to the value of the assets in an organization. An organization’s position is shown on its balance sheet.

Cash

Profit and position define the third imperative: cash. Every manager and every WLP professional who wants a seat at the table must understand that profit does not equal cash. An organization may be making a profit, but the actual cash from that profit may be tied up in forms that are not easy to spend. The cash may be tied up in what is known as accounts receivable, or the payments owed to the organization by its customers for what they have purchased. Or, the cash may be tied up in the form of inventory, the stock on hand that’s ready to deliver as soon as a sale is made.

Senior managers must always ensure that the organization has enough real cash on hand at all times to cover its payroll, expenses, and loan payments. The sources and uses of cash come from continuous changes in the net income, assets, and liabilities. These changes are documented in the cash flow statement.