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many new managers similarly think that the only financial statement they need to
manage their business effectively is an income/P&L statement; that a cash flow
statement is excess detail. They mistakenly believe that the bottom-line profit is all
they need to know and that if the company is showing a profit, it is going to be

successful. In the long run, profitability and cash flow have a direct relationship, but
profit and cash flow do not mean the same thing in the short run. A business can be
operating at a loss and have a strong cash flow position. Conversely, a business can
be showing an excellent profit but not have enough cash flow to sustain its sales
growth.
The process of reconciling cash flow is similar to the process you follow in
reconciling your bank checking account. The cash flow statement is composed of: (1)
beginning cash on hand, (2) cash receipts/deposits for the month, (3) cash paid out for
the month, and (4) ending cash position.
KEY TAKEAWAY
The financial controls provide a blueprint to compare against the actual
results once the business is in operation. A comparison and analysis of the
business plan against the actual results can tell you whether the business is on
target. Corrections, or revisions, to policies and strategies may be necessary to
achieve the business’s goals. The three most important financial controls are:
(1) the balance sheet, (2) the income statement (sometimes called a profit and
loss statement), and (3) the cash flow statement. Each gives the manager a
different perspective on and insight into how well the business is operating
toward its goals. Analyzing monthly financial statements is a must since most
organizations need to be able to pay their bills to stay in business.
EXERCISES
1. What are financial controls? In your answer, describe how you would
go about building a budget for an organization.
2. What is the difference between an asset and a liability?
3. What is the difference between the balance sheet and an income
statement? How are the balance sheet and income statement related?
4. Why is it important to monitor an organization’s cash flow?

6.4 Nonfinancial Controls
LEARNING OBJECTIVES
1. Become familiar with nonfinancial controls.
2. Learn about common mistakes associated with nonfinancial controls.
3. Be able to devise possible solutions to common mistakes in
nonfinancial controls.
If you have ever completed a customer satisfaction survey related to a new
product or service purchase, then you are already familiar with nonfinancial controls.
Nonfinancial controls are defined as controls where nonfinancial performance
outcomes are measured. Why is it important to measure such outcomes? Because
they are likely to affect profitability in the long term.
How do we go about identifying nonfinancial controls? In some areas it is easy
to do, and in others more difficult. For instance, if Success-R-Us were having trouble

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