I am often surprised how many supply chain managers...

...don’t understand accounting fundamentals.

In the 1980s and 1990s, graduating with a business degree from an American university required taking at least two different accounting classes, Introduction to Accounting and Managerial Accounting. However, now accounting is looked upon as a specialization or an area of concentration. So you can graduate with a degree in Supply Chain Management from one of the many business schools offering the degree and never have to crack an accounting book.

That is unfortunate.

Why? Because accounting is the language of business. And while we may think that Supply Chain management touches just about every factor of business, accounting is the language of the very businesses that we manage. If you can’t speak the language, how can you communicate?

Business is an intellectual sport. It is one of the few areas in our working life where the muscle between your ears is far more important than the rest of the muscles in our bodies. To succeed in business, you must employ your knowledge and wisdom, you must think, ponder, and understand. I call business a sport because we think about it and use vocabulary to describe what we do in the same way that we refer to sports. We form teams, tackle problems, train the teams, monitor progress.

Just as every sport has scoreboards, business has scoreboards too. The scoreboards of business are the income statement, the balance sheet and the cash flow statement. While many Supply Chain Managers claim to understand how to read these scoreboards, many do not understand the relationships between the three statements. You could be surprised where different business transactions actually could appear in financial records.

Here are a few examples:

  1. The company bought some land to build a new distribution center. The company borrowed $10 million and added in another $4 million out of on-hand cash to close the deal. Where does the loan transaction happen? Where do we book the asset we bought?
  2. The company buys $1 million in inventory. Over three months, the company makes three huge sales of the inventory. Where do we book the inventory purchase? Where do we book the sales?

If you used the words “income statement” in answering the questions in example #1, you are wrong. All of the transactions happened on the balance sheet. For example #2, the inventory purchase happens on the balance sheet, the sales happen on the income statement, and the value of the inventory moves from the balance sheet to the income statement.

Understanding the language of business is fundamental to a well-rounded Supply Chain Manager. The CEO and the CFO speak in business languages of business and finance. To understand the goals that the CFO and CEO set for the company, and to know how well we are achieving those goals, we must use the language of business. The articles in this section do not replace good accounting training. However, the articles do help illustrate many of the transactions and challenges we find in Supply Chain Management. Spend time in these articles and you will gain a basic knowledge and understanding of accounting language.

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