As part of one of the liveliest discussions Farm Equipment editors have had on the accounting topics with equipment dealerships, Kern Machinery CFO Marty Buck shared some takeaway value for some who wonder what their bean-counting teammates are up to, or what some of their words mean.
Definition of Roles — “Accountants impose order on chaos through two elements — people and processes. The comptroller manages the general ledger. The role of the chief financial officer (CFO) is to dial down deeply and understanding the business and to increase the equity of the owners.”
The Pyramid of Finance — “From the bottom, it’s transactions (day-to-day business), reporting (handled by comptroller and staff accountants) and the financial analysis (CFO). They’re all predicated upon one another. If you don’t have good transaction processing, your reporting is off and then, well, good luck on your analysis. “
The Treasury Report — “The treasury report projects the money that will be generated by the business and what will be done with it. So let’s say we make X money. What are we going to do with it? We’re going to contribute this much to taxes, we’re going to take this much out and we’ve got some prior commitments for some financing that we did, and then look at our maintenance capital. The need for reinvestment in the business is stressed through the treasury report.”
Maintenance vs. Investment Capital —“You must understand the difference between maintenance capital and investment capital. Maintenance capital is that capital you must invest annually to keep doing what you’ve been doing. Investment capital is the capital that you invest to expand your potential business. For example, replacing a service truck is maintenance capital. Adding a service truck to your fleet is investment capital. If you’re not investing in maintenance capital, then you’re consuming the very assets that you use to run the business. You don’t know it, but you’re slowly going out of business.”
Financial vs. Management Accounting — Financial accounting is what’s necessary for the outside world, banks, auditors, GAAP principles. Management accounting is internally focused and it’s for the purposes of allowing the operators of the business to run the business; it does not have to reflect GAAP principles. There’s a small chart of accounts needed for financial accounting, and all the rest is management accounting. Understanding this difference, he says, solves much of the tension that can exist between business’ sales and accounting departments. (Click here to learn more)