What Everyone in Business Needs to Know about Finance and Accounting

Finance is important to any manager because every strategic decision has financial implications. "Sooner or later in your career, you will come up against financial statements, and they will have names that don’t mean what you think they mean," said Richard A. Lambert, Millerd-Sherrerd Professor, professor of accounting, and academic director of the Finance and Accounting for the Non-Financial Manager program. "You will have ideas for new projects and want to find out their impact."

The Wharton Finance and Accounting program covers core concepts in accounting, such as financial statements and analysis, project evaluation, assessing earnings, cost accounting, and the judgment calls involved in financial decisions. "We go from learning the basic language of finance and accounting to analyzing a company’s financial statements," said Lambert at the start of the program in October. "We will not teach you to become an accountant, but to be a more informed user of financial statements."

The Language of Accounting

In addition to specific tools, managers need to understand some of the broader concepts about finance and accounting, including:

• "The most important decisions that drive financial performance are not made by finance people, but by people in other areas of the business who need to understand finance."
  —John R. Percival, Adjunct Professor of Finance, The Wharton School

  Accounting is a language: "Many people think of accounting as a quantitative topic, but it is really more of a language," Lambert said. "This course is a total immersion to get you up to speed on what the words mean. The objective is to teach you to be able to express your ideas in the same vernacular as other people in finance and accounting. With that fluency, you can participate in financial discussions and be more valuable to your organization." 
  
  Brian Bushee, Wharton associate professor of accounting, who also teaches in the program, noted that double-entry bookkeeping — tallying up assets and liabilities — goes back to the time of Venetian merchants. "If they can understand it, so can you."

• Accounting is only part science: While you may end up with precise numbers, accounting is far from cut and dried. "You need to appreciate how much of it is science versus how much is art," Lambert said. "Accounting sometimes involves making the numbers support getting a project funded or a decision made. You need to be able to ferret this out." There are decisions under every number, and sometimes this flexibility can be manipulated — the "dark side" of accounting. But even when there are no nefarious motives, different judgments lead to different results.
  
  Bushee recalled the example of an Australian firm that had five percent growth under Australian rules and a six percent decline under U.S. rules. That took some explaining to shareholders. The old joke is that if you ask an accountant what is two plus two, the reply is: "What do you want it to be?" Bushee noted that while in the movies shady mobsters keep two sets of books, most upstanding companies actually keep three, with different sets of numbers relevant to tax authorities and shareholders.

• All managers need to master financial statements and analysis: Managers need to be able to read and interpret the balance sheet, income statement, and cash flow statement. They need to know basic financial analysis, particularly the time value of money embodied in "net present value." They also need to understand the value of their own businesses or potential acquisition targets, and how to build this value through their decisions.
  
  
• Finance and strategy are closely related: "What is strategic also is financial," said John R. Percival, Wharton adjunct professor of finance and academic director of Creating Value Through Financial Management, which offers a deeper understanding of financial decision making. "People need to understand that non-financial decisions have important financial implications. They need to make the link between the numbers and results. The most important decisions that drive financial performance are not made by finance people, but by people in other areas of the business who need to understand finance."

Foreign Territory for Both Liberal Arts and Engineering

Finance and accounting can be just as challenging for engineers as for liberal arts graduates or creative professionals. "Because finance is a bit of a science and a bit of an art, it can challenge people at both ends of the spectrum," Percival said.

Engineers, with a quantitative bent, might be expected to adapt to finance and accounting quite easily. Their training, however, does not necessarily encourage them to understand the wiggle room of financial decisions. "There are more judgments that you have to make in finance and accounting than in natural science," Percival said.

On the other hand, creative professionals might perceive finance and accounting as a cut-and-dried science, and be put off by it. In reality, since there are many judgments involved, seeking out the story behind the numbers is a much more creative process than might be expected.

An Immersion Program

Finance and Accounting for the Non-Financial Manager teaches how financial data is generated, reported, and used for decision making, analysis, and valuation. The program describes the accounting process, the creation of financial statements, the role of the auditor, and the basics of income tax. It examines specific accounting methods and demonstrates how these choices affect earnings. Case studies and evening integration sessions apply these concepts to real analysis and create a deeper understanding of the real implications of decisions for participants’ companies.

"There are people who go through their careers without really knowing much about finance," Percival said. "They would have been more effective managers if they had understood this stuff. Every functional area of business is involved in decisions that affect financial performance. It is hard to imagine that you can be effective as a manager without knowing finance and accounting."

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