Lexicon - Financial Controlling

BWA (Business Management Analysis)

Business Management Analysis (BWA) is a crucial internal accounting tool used for regular financial monitoring and control. It provides a concise summary of financial results and company condition over a specific period, typically monthly or quarterly.

BWA contains various key figures and financial data, including sales, costs, profits, liquidity, and others. It provides a quick overview of financial performance and enables company managers and controllers to respond rapidly to changes. Here are several important aspects of BWA and its application in controlling:

Financial Monitoring: BWA enables (when properly prepared) evaluation of financial performance compared to budgets or previous year periods. This allows for identification and analysis of variances.
Liquidity Management: The company's liquidity situation is clearly visible in BWA. This helps identify bottlenecks in time and take appropriate actions.
Cost Control: BWA shows the company's cost structure and its development. This enables identification and reduction of unnecessary expenses.
Profitability: By analyzing profit margins and other profitability indicators, the company can assess its profitability and develop strategies to increase it.
Decision Making: BWA provides data-driven information essential for strategic decisions. It supports management in planning future actions.

Overall, BWA is a powerful controlling tool. It provides insight into the company's financial condition and helps create a solid foundation for financial decision-making. Regular evaluation and analysis of BWA enables more effective company management and achievement of financial stability.

Controlling

Controlling is a vital concept in business management. It refers to systematic planning, monitoring, and control of company resources and processes to effectively achieve corporate goals. The main objective of controlling is to ensure economic efficiency and company profitability.

Various instruments and key data are used in controlling to evaluate financial performance, goal achievement, and company efficiency. These include budgeting, cost accounting, financial analysis, and reporting. These tools help managers and executives make informed decisions and continuously optimize business processes.

Controlling tasks include budget planning, monitoring actual data against budgets, identifying variances, and developing corrective actions. It plays a key role in supporting management in making strategic decisions by providing essential information and analyses that serve as a solid foundation for those decisions.

Overall, controlling helps ensure financial stability, profitability, and long-term company competitiveness. It is an important part of modern business management and supports leadership in achieving goals and success.

Financing

Financing refers to the process of providing capital to a business entity to support its financial goals. This can mean securing funds for companies, projects, or investments. There are various types of financing, including:

Equity Financing: where financial resources come from the company's own resources, such as equity capital and profits.
Debt Financing: where external funding sources are used, for example through bank loans or bond issues.
Mezzanine Financing: This form of financing combines features of equity and debt financing and includes, for example, convertible bonds or profit-participating loans.

The type of financing chosen by a company depends on its financial needs, risk appetite, and other factors. Financing plays a crucial role in business management and investment decisions.

Financial Liquidity

Liquidity refers to the ability of a company or individual to meet their financial obligations in a timely manner. It is an important indicator of financial health and company stability. If a company is liquid, it means it has sufficient available funds or easily convertible assets to cash to cover current bills, debts, and other payment obligations.

Liquidity can be divided into different levels, including:

Operational Liquidity: refers to the company's ability to cover daily operational expenses such as salaries, supplier invoices, and rent.
Long-term Liquidity: refers to the ability to service long-term obligations such as loans and bonds.
Total Liquidity: This is the total amount of cash and assets held by the company.

Sufficient liquidity is crucial for avoiding financial crises and maintaining the trust of creditors, suppliers, and investors. It enables the company to take advantage of opportunities and respond flexibly to changes in the business environment.

Effects of Negative Financial Liquidity

Effects of Negative Financial Liquidity Negative financial liquidity can have serious consequences for a company, including:

Insolvency risk: Insufficient liquidity exposes the company to the risk of insolvency. This means it may be unable to meet its financial obligations, such as paying invoices, salaries, and loan instalments. In extreme cases, this may lead to bankruptcy and legal repercussions.
Limited operating capacity: Companies with negative liquidity have reduced operational flexibility. They may be unable to fund urgent investments, settle supplier invoices on time, or seize market opportunities – all of which can hinder growth.
Credit rating deterioration: Liquidity problems can erode the trust of creditors and investors. A declining credit rating reduces access to financing and increases the cost of borrowing.
Legal implications: In many jurisdictions, company directors are legally obliged to file for insolvency if the business can no longer meet its payment obligations. Failing to comply with these requirements may result in personal liability and legal consequences for the management.
Loss of staff and customers: Negative liquidity may cause delays in salary payments and damage employee morale. Customers, concerned about the company's reliability, may choose to take their business elsewhere.

Cash Flow

Cash flow is a key concept in corporate finance and controlling. It refers to the net surplus of incoming over outgoing payments within a specific period. This surplus of liquid funds is critical to a company’s financial stability, as it indicates whether sufficient capital is available to cover current expenses and investments.

In controlling, cash flow acts as a direct indicator of liquidity. Businesses use cash flow analysis to plan both short-term and long-term financial strategies and to avoid liquidity shortfalls. Positive cash flow indicates that more funds are entering the business than leaving, contributing to financial stability. Negative cash flow, on the other hand, may signal liquidity issues that require careful analysis and potential strategic adjustment.

Overall, cash flow is an essential management tool for assessing a company’s financial position, supporting sound decision-making, and ensuring long-term viability.

Liquidity Planning

Liquidity planning is a critical component of financial management. It involves forecasting available cash over a future period to ensure the company can meet its obligations and finance planned activities. This process includes a structured assessment of incoming and outgoing cash flows, ensuring the availability of funds for day-to-day operations, liabilities, and investments.

The forecasting element is essential. Based on historical financial data and future projections, it incorporates expected revenues, costs, inflows, and outflows. By doing so, potential liquidity gaps can be identified early, allowing preventive measures to be taken in advance.

Liquidity planning directly influences both controlling and cash flow:

Controlling: Liquidity planning is an integral part of controlling, allowing companies to monitor and steer financial performance by comparing forecasts with actual results.
Cash Flow: Effective liquidity planning supports the goal of maintaining a positive cash flow by aligning inflows and outflows and ensuring liquidity at all times.
Risk Management: Anticipating cash shortages makes it possible to identify financial risks early and take appropriate actions to mitigate them. This strengthens overall company resilience.
Bank Relations: If liquidity forecasts highlight potential payment difficulties, early communication with the company's bank can be initiated. Well-prepared discussions – supported by reliable forecasts and data (e.g., from tools such as Companyon) – are far more effective than last-minute crisis negotiations.
Investment Planning: Liquidity forecasts support investment decisions by showing whether funds are available for new projects or whether external financing will be required.

Forecast

The term forecast in corporate planning refers to systematically estimating and predicting future business development and financial results. This process is crucial for making informed strategic decisions, effective resource planning, and achieving long-term goals.

Forecasting in corporate planning can include various aspects:

Sales Forecasting: This process determines expected company sales in a given period. It's crucial for setting sales targets and planning marketing strategies.
Profit Forecast: This forecast aims to determine expected company profit by considering anticipated revenues and expenses. It helps with budgeting and profit maximization.
Cost Forecast: Estimates expected personnel costs, materials, operating costs, and other expenses. This enables efficient resource allocation.
Cash Flow Forecast: Estimating expected cash flows is crucial for ensuring the company has sufficient financial liquidity to maintain current operations.
Risk Assessment: Forecasting enables identification of risks and uncertainties that may impact business planning. This allows companies to take action to minimize risks.

Forecasts are often created using various methods and tools, including statistical analyses, historical data, market analyses, and expert opinions. They are essential tools for creating solid foundations for corporate planning and ensuring long-term success.

Scenario

A scenario in corporate planning refers to forecasting possible future events to make informed decisions and assess risks. It's a method that enables companies to analyze different possibilities and their impact on business strategy. Here are two examples:

Example 1: Investment Decision A company plans to invest in a new production facility. It creates different investment scenarios: Optimistic scenario: The facility is completed on time, product demand is high, and profits grow rapidly. Pessimistic scenario: Construction delays occur, market demand is lower than expected, and profits remain low. Realistic scenario: Construction proceeds largely according to plan, demand meets expectations, and profits grow moderately. By analyzing these scenarios, the company can better understand potential risks and opportunities associated with the investment and make an informed decision.
Example 2: Personnel Actions A company considers expanding its sales organization by several employees. The scenario can now be used to calculate whether the expected additional income exceeds the expected additional costs. This enables a reliable assessment of whether recruitment makes economic sense. In another example, the impact of wage increases due to a new collective agreement on earnings can be calculated. Different measures can be derived depending on the forecast: Raising own sales prices or cutting costs elsewhere. In both cases, scenarios enable making justified decisions and help consider possible risks and opportunities in corporate planning.

Budget Plan

Budget planning is a key component of operational financial management. It refers to the process of creating and managing a financial plan for the future of an organisation. This plan typically outlines expected revenues, expenses, and investments over a specific period – most commonly the upcoming financial year or a multi-year horizon.

During ongoing financial monitoring, budgeted figures are compared with actual results as part of variance analysis (budget vs actual). This allows companies to quickly assess whether performance aligns with expectations or whether deviations are occurring – for example in sales or cost areas.

Budget planning is usually carried out before the beginning of the relevant financial period. In contrast, forecasting is used during the financial year to update the original plan in response to current developments.

Budgets serve as a financial benchmark for management decisions and enable regular monitoring of the company’s financial performance against defined targets.

Unlike scenario planning, which considers multiple potential future developments to support decision-making, budget planning is more static – it assumes a single, base-case scenario as the foundation for financial planning.

In summary, budget planning is a precise, finance-driven process that sets specific financial and operational targets for the company’s future. It differs from forecasting in terms of accuracy and fixed assumptions, and from scenario planning through its focus on a single predefined scenario.

Target/Actual Analysis

Target/actual analysis (also known as plan/actual analysis) is an important method in controlling and business management. It serves to compare actual company results and performance with planned or expected goals and tasks. The following steps are taken:

Target Specification: First, target values are defined. These are expected or planned goals for sales, profits, costs, or other performance indicators. These goals are often defined in budgets or plans.
Actual Result: The company's actual results and performance are then recorded. This usually occurs through analysis of business data, reports, and key figures.
Comparison: Target values are compared with actual results. This includes analyzing the extent to which the company achieved its goals. Deviations can be identified, both positive (overachievement) and negative (underachievement).
Variance Analysis: Analyzing deviations is central to target/actual analysis. It examines why certain goals weren't met or why they were exceeded. This enables planning and implementing corrective actions.
Control and Optimization: Decisions about company control and optimization can be made based on the analysis. This may include adjusting strategies, budgets, or operational processes.

Key Performance Indicators, KPIs

Key figures, also known as Key Performance Indicators (KPIs), are numerical values or metrics used to measure, monitor, and evaluate a company's or specific area's performance and success. They play a crucial role in controlling and business management.

The importance of key indicators in controlling stems from various reasons:

Measurability: KPIs enable quantitative measurement of various company aspects, such as sales, costs, profit, efficiency, customer satisfaction, and others. This measurability facilitates tracking changes and development in the company.
Orientation: KPIs serve as guides for company goals. They help set clear objectives and monitor progress toward achieving them. This enables focused and targeted business management.
Early Warning System: KPIs can serve as an early warning system to recognize problems or deviations from goals early. This enables taking corrective measures in time and preventing negative developments.
Decision-Making Basis: Controlling key figures provide decision-makers with important information that helps them plan and manage the company. They form an objective basis for strategic and operational decisions.
Transparency: Using key data makes company results transparent and understandable. This promotes employee accountability and helps increase efficiency.

Overall, key performance indicators are essential in controlling for analyzing, evaluating, and continuously improving company results. They provide a data-driven foundation for strategic orientation and operational business management.

Excel as a Controlling Tool

Excel is undoubtedly the favorite controlling tool for many smaller companies. It offers numerous advantages that increase its attractiveness for this target group. However, there are also certain challenges and risks associated with using Excel as a controlling tool.

Excel's Capabilities in Controlling:

Cost-effectiveness: Excel is widely used and already available in most companies. It requires no additional license costs, making it cost-effective for smaller companies.
Flexibility: Excel is extremely flexible and can be adapted to individual company requirements and needs. It enables creating custom reports and analyses.
Quick Implementation: Excel spreadsheets can be created and used quickly (assuming appropriate knowledge). This enables rapid implementation of control measures.

Challenges and Risks:

However tempting it may be, especially due to costs, to create an Excel-based controlling tool independently, this decision comes with certain serious consequences and risks:

Manual Effort: Every change, every adjustment (in the program, but also reports or analyses) must be implemented in Excel by the user themselves. This leads to significant time investment, which quickly offsets the apparent cost advantage.
Manual (Monthly) Data Entry: Excel often requires manual data entry, which can be error-prone. This can lead to inaccuracies in reports.
Limited Function Scope: Starting with a self-programmed Excel controller is often quite easy, at least for experienced users. However, even such users reach their limits (in terms of time or content) when functions need to be added (e.g., automatic profit or liquidity forecasts).
Limited Scalability: Excel reaches its limits when companies grow and require more complex data analyses. Managing large amounts of data can be problematic.
Lack of Data Integrity: Without proper controls, ensuring data integrity in Excel can be difficult, especially when multiple users have access to files.
Lack of Automation: Excel offers limited process automation capabilities. This can be time-consuming and affect efficiency.

GDPR

GDPR stands for "General Data Protection Regulation." It is a regulation used in connection with electronic accounting and archiving of company data.

GDPR is a series of guidelines and standards developed by data protection authorities. Their aim is to ensure that digital documents and data are transparent, identifiable, and auditable for data protection purposes. This is particularly important in preventing data breaches and ensuring companies maintain proper data protection practices.

GDPR specifies how companies must record and store their digital documents and make them available for audits conducted by supervisory authorities. This includes requirements for electronic accounting, electronic bookkeeping, and digital document archiving. Companies must ensure their digital documentation complies with GDPR to maintain regulatory compliance.

Overall, GDPR serves to regulate digital transformation in terms of accounting and archiving and ensures that companies and authorities can access digital documents in an effective and auditable manner.

Entity

This is a general explanation of the term "entity":

In the software world, the term "entity" typically refers to an object or unit that exists in a system and has specific properties or characteristics. An entity can take various forms, such as a person, company, product, or concept.

Imagine a database where information is stored. Each type of information is often assigned to a specific entity. For example, a "company" entity might contain information such as company name, address, and industry. Another entity might be "Product" and contain information such as product name, price, and availability.

Entities allow programmers and database administrators to organize and manage information by structuring different types of data into clearly defined units. This makes it easier to search, update, and process information in the system.

Trial Balance (T-Balance)

Trial Balance is a tabular statement used in accounting and finance to provide a clear overview of a company's or organization's financial position. It is an important element in preparing financial statements and reports to analyze and document financial results.

The structure of a trial balance typically consists of several columns and rows. Here are the typical elements:

Account Number/Name: The first column contains a list of account numbers or names. These accounts represent various aspects of financial transactions, such as revenue, expenses, assets, and liabilities.
Opening Balance: The next column contains the opening balance of the account at the beginning of the analyzed period. This opening balance is usually carried forward from the previous period.
Additions: All additions to the respective accounts are recorded in this column. These can be income, costs, or other financial transactions that occurred during the period under review.
Withdrawals: All withdrawals from accounts are recorded here, such as expenses or losses.
Balance: The balance is calculated in the next column by subtracting withdrawals from additions. The balance shows the current state of the account at a specific point in the analyzed period.
Cumulative Balance: This column shows the cumulative balance over the entire period. This means that the balance values in each period are summed to show the cumulative balance.

Investment Planning

Investment planning is a crucial process in business management and finance. It refers to the strategic preparation and analysis of planned investments in a company. The main goal of investment planning is to make wise decisions about using financial resources to ensure long-term growth and profitability. Investment planning is also an essential element of budget planning.

Investment planning considers various factors, such as identifying investment opportunities, estimating costs and risks, forecasting future cash flows, and selecting the best projects or assets to invest in the company. This process helps companies use their financial resources effectively and ensure investments align with long-term business goals and profitability.

Investment planning is an ongoing process, as companies must adjust their investment strategies to changing market conditions and business requirements. Prudent investment planning can help create financial stability and growth opportunities for the organization.

Cash Flow Statement

The cash flow statement is a financial reporting tool used by companies. Its main purpose is to provide a detailed overview of a company's cash inflows and outflows during a specific period, typically a fiscal year. This enables stakeholders (e.g., investors, lenders, or management) to understand where money comes from and how it's spent.

The cash flow statement is typically divided into three main sections:

Operating Activities: This section shows cash flows from core business operations and includes activities such as selling goods, receiving customer payments, or payments to suppliers.
Investment Activities: This section presents cash flows from investments in fixed assets, such as machinery, real estate, or investments in other companies.
Financing Activities: This area provides information about cash flows related to obtaining and repaying debt or issuing and repurchasing equity (e.g., shares).

Chart of Accounts and Standard Chart of Accounts

A chart of accounts (CoA) is a structured list of all general ledger accounts used in a company's or organisation's accounting system. It includes all necessary accounts required to record financial transactions, prepare financial reports, and meet tax reporting obligations.

The main purpose of a chart of accounts is to organise financial data in a way that makes it easy to understand, analyse, and report. Transactions are categorised into clearly defined accounts – such as revenue, expenses, assets, liabilities, and equity – each with a unique number and account name.

The chart of accounts is typically organised hierarchically:

higher levels represent general account groups (e.g. "Cash", "Bank")
lower levels represent more detailed subaccounts (e.g. "Trade receivables", "Accounts payable")

Charts of accounts may vary depending on the country, industry, legal form of the business, and applicable accounting standards (e.g. IFRS, local GAAP). A well-designed CoA improves the quality, transparency, and consistency of financial information.

A standard chart of accounts is a uniform and predefined structure of accounts used to record, organise, and monitor a company's financial transactions in a consistent way across periods, entities, or even entire industries.

It groups accounts under common headings such as:

Assets
Liabilities
Equity
Revenue
Expenses

Each account is assigned a specific number and descriptive name, indicating the type of transactions recorded under that account. The use of a standard chart of accounts enables:

efficient preparation and comparison of financial reports (e.g. balance sheet, profit and loss account)
regulatory compliance and reporting
improved external communication with banks, tax authorities, and auditors

Different countries and industries may prescribe or recommend specific standardised charts of accounts, aligned with legal and reporting requirements. Their use supports data accuracy, comparability, and compliance with accounting regulations.

Financial Analysis

Financial analysis is the process of examining and evaluating a company's or organization's financial condition. It involves a systematic review of financial data, reports, and other relevant information to gain insight into an organization's financial performance and stability.

During financial analysis, various financial ratios are calculated and interpreted to assess a company's financial situation. These include key figures such as liquidity ratios, profitability, debt levels, and growth rates. These indicators enable the identification of trends and patterns in financial data and draw conclusions about a company's profitability, financial stability, and efficiency.

Financial analysis is important for various purposes. Companies use it for making decisions about investments, loans, budgeting, and strategic planning. Investors use it to evaluate a company's attractiveness as an investment. Lenders use it to assess a company's creditworthiness. Government agencies and analysts use it to monitor the economy and financial sector.

Overall, financial analysis helps make informed decisions and minimize risk by providing a comprehensive picture of a company's financial condition. It's an important part of corporate governance and the investment process.

Depreciation

Depreciation is an accounting concept that describes the systematic reduction of the book value of assets over time. It reflects the depreciation or wear and tear of assets such as machinery, buildings, or vehicles during their useful life. Depreciation allows companies to evenly allocate the cost of acquiring an asset across its entire period of use, improving the accuracy of financial reporting and profit measurement. This process also helps to determine the actual value of assets on the company's balance sheet and records depreciation over time.

Depreciation has a significant impact on both the balance sheet and the income statement:

Impact on the balance sheet:

Depreciation affects the balance sheet by reducing the value of assets over time. For example, when a company owns machinery or buildings, these assets must be depreciated over their useful life as they lose value or reach the end of their service life. In the balance sheet, depreciation is recognised by increasing accumulated depreciation under assets as a contra-asset, which reduces the net book value of the fixed asset. This ensures that the balance sheet reflects the asset's current value.

Impact on the income statement:

Depreciation also has a direct impact on the income statement. It is recorded as an operating expense, and therefore reduces the company's profit. This is because depreciation corresponds to the actual cost associated with the use of assets. Higher depreciation results in lower profit reported in the income statement. A lower profit may also have tax implications, as in many cases companies pay taxes based on their gross or net profit.

In summary, depreciation reflects the loss of value of assets in the balance sheet and is recorded in the income statement as a cost that affects reported profit. It is an important accounting element that helps companies accurately represent their financial performance and the value of their assets.

Income Statement

The income statement is a key component of a company's financial reporting. It is a financial summary that provides information about a company's revenues, expenses, and resulting profit or loss over a specific period. It is typically prepared on an annual or quarterly basis and presents the company's financial performance in a clear and structured way.

The income statement includes:

Revenue from sales of goods and services
Other operating income
Financial income, such as interest, dividends, and investment gains

It also includes:

Operating expenses, such as salaries, rent, materials, taxes, and utilities
Financial expenses, e.g. interest on loans
And any extraordinary losses

The key element of the income statement is the calculation of the net result – either profit or loss. If revenues exceed expenses, a profit is reported; otherwise, a loss is recorded.

This report not only reflects the company's financial condition, but also serves as a crucial source of information for investors, lenders, and other stakeholders, enabling them to assess the company's economic health and profitability. It is a fundamental tool for both financial analysis and management decision-making.

Balance Sheet Analysis

Balance sheet analysis is the process of evaluating a company's financial position and performance based on its balance sheet, income statement, and other financial reports and indicators. The goal is to gain an accurate understanding of the company's financial standing to support informed decision-making by management and stakeholders.

This type of analysis involves calculating and interpreting key financial ratios that provide insights into the company's liquidity, profitability, debt levels, and operational efficiency. These indicators are useful for investors, lenders, managers, and other stakeholders when assessing financial stability and growth potential.

Balance sheet analysis helps identify trends over time, allows comparisons with industry benchmarks or competitors, and supports the development of strategies aimed at improving financial results.

Examples of balance sheet analysis applications:

Liquidity Analysis: A controller or financial manager can use balance sheet data to assess the company's liquidity. A key metric is the current ratio, calculated by dividing current assets (such as cash, receivables, and inventory) by current liabilities (such as trade payables and short-term loans). A ratio above 1 indicates that the company is likely able to meet its short-term obligations. A detailed analysis can help detect potential liquidity bottlenecks early and support timely corrective actions.
Profitability Analysis: Another important use of balance sheet analysis is evaluating return on equity (ROE), which measures how efficiently a company uses its equity to generate profit. ROE is calculated by dividing net profit by shareholders' equity. A high ROE suggests effective use of capital and strong profitability, while a declining ROE may signal inefficiencies or financial issues. Profitability analysis enables controllers and managers to assess long-term performance and adjust strategy as needed to enhance profitability.

Consolidation

Consolidation is an essential controlling process that aims to combine financial and operational results from multiple legal entities or business units into a single, transparent presentation. This process is particularly important for companies with several subsidiaries or branches, as it provides a clear and unified picture of overall company performance.

Consolidation involves combining various financial data such as sales, costs, investments, and forecasts. This often occurs using specialized software that ensures automatic and consistent data consolidation.

Consolidation is vital not only for external reporting but also for internal management and decision-making processes. It enables management to make well-founded decisions and effectively control company development.

Segmentation

Segmentation is an important process in controlling that allows a company to be divided into separate business units, such as branches, regions, product lines, or customer groups. It enables detailed financial analysis and effective management of the performance of individual areas of the business.

Segmentation gives companies the flexibility to define segments and allocate business analyses (e.g. BWA) accordingly. This allows for the creation of an income statement for each segment, which facilitates a more accurate assessment of the profitability and efficiency of specific areas.

An additional advantage of segmentation is the ability to take targeted actions to improve segment performance, based on the identification of strengths and weaknesses within different parts of the organisation. Segmentation also supports efficient resource allocation and strategic planning, as it allows management decisions to be tailored to the unique needs and challenges of each segment.

In summary, segmentation is an essential controlling tool that helps companies optimise financial performance, improve data transparency, and make more informed management decisions.