Interpreting Business Transactions

Businesses are the very blood of economic development; it is why it is very important that schools like the LBS exist to raise business leader who can build successful businesses. Two months into business school and I can begin to see that my dislike for accounting and account related conversations have changed. I beginning to look at figures and try to understand what story it tells.

So we are on to the second half of corporate financial accounting with a new lecturer and a new style of teaching, still as interesting as the previous lecturer. The area of study now is to understand the numbers and understand what they are saying to you as an executive and what decision options you have based on what the numbers are saying.

There is a graduated way to review numbers and interpret them especially on a case-by-case basis, accounting transactions are not black and white, interpretations always require a context. It is interesting how context plays a similar role as punctuations do in communication. Context is what would determine whether buying a car is a fixed asset or a current asset or even a liability, same with land. I had come with the notions that certain acquisitions are assets other are liabilities without considering the business idea, business model or context. One of the major unlearnings and relearnings.

One other major learning from the CFA class this week was understanding the importance of raising the right type of capital and amount, also being able to determine how much is sufficient for the business. Raising excess capital whether in debt for or equity form is not good for the business, raising excess debt will increase the cost of your business and make you over leveraged with will also reduce the profitability of the business, if excess equity than required is raised it is usually almost impossible to return as legal steps need to be taken to effect that change. In essence it may be better to have excess debt as to fix the situation the debt can be paid back.

We had to review the accounts of JPREP a business which after review raised more money tan required to run the business. Jprep has been an interesting case study to learn and understand new finance concepts, what is most interesting how the classification of review one transaction can lead to a 30minutes discuss of arguments and counter arguments because of context and the different translation of context by fellow executives.

Corporate Financial Accounting as it does every week has opened my eyes to the crucial role of context and how it is important to constantly understand this for all transactions. Understanding the business concept or model is also important. This is one of the reasons lawyer are very crucial in the design and development of agreements for financial transactions, these agreement try to change or define context for the business, hence when reviewing transaction it is important to always not that it is substance over form.

I love that I am beginning to enjoy accounting/finance as some people will say what God cannot do does not exist.