Book: Finance For Managers
By: Harvard Business Essentials
I chose to read this book to learn more about finance and accounting for my own business, but also to learn how to better analyze and value companies for investment.
What I learned
Financial Statements
The Income Statement tells whether the company is making a profit. The Balance Sheet shows how efficiently a company is using its assets and managing liabilities in pursuit of profits. The Cash Flow Statement tells how much cash has been increased or decreased through operations, the acquisition or sale of assets, and financing activities.
Important Accounting Concepts
Accounting is a huge undertaking and should be managed by a professional accountant. Different methods are used for a variety of reasons and should be tailored for the company. Cost accounting is usually the issue managers are most involved in, as it helps to understand which operations or products are contributing to profit, and which are not.
Taxes
The way a business is structured depends on the goals of the owners and investors. Each structure has benefits and drawbacks. Liability and taxes are two big things to consider. Marginal tax rate is explained, as well as the difference between credits and deductions.
Money and Capital Markets
Corporations turn to money and capital markets for funding. The Money Market is the financing source for short-term debt financing. Capital Markets are for securing long-term debt (Bonds) and where equity securities (Shares of Stock) are issued and traded. Institutional and individual investors use these markets to get returns on their capital.
Budgeting
There are several types of budgets, and use depends on need. Short vs Long term, fixed month to month vs rolling, among others. Forecasting is an important practice to keep a business on track. What if scenarios and sensitivity analysis are important for contingencies.
Practical Tools for Management Decisions
Return on Investment (ROI), Cost/Benefit analysis, how long it takes to recoup capital on an investment and breakeven analysis are important concepts to understand when making business decisions and assessing performance, but often don’t tell the whole story. Still, they must be determined before making decisions on ventures within the business.
The Time Value of Money
These tools are the most valuable for managers and analysts. Net Present Value (NPV) is the monetary value today of future positive and negative cash flow streams discounted at some annual compound rate. This is used to see if money would be better served using some other financial instrument than being used in the business, or any number of other decisions. The Internal Rate of Return (IRR) is another tool used to make business investment decisions. IRR is the discount rate at which NPV equals zero. CFO’s use the IRR to determine hurdle rate, the rate of return a venture must exceed to be eligible for undertaking. Economic Value Added (EVA) is net operating income after tax less the cost of capital used to obtain it.
Valuation Concepts
Company Value is tricky and should involve professional appraisers when buying or selling a business. The three approaches to business valuation are Asset Based, Earnings Based, and Cash-Flow Based. Asset Based Valuation can be equity book Value, Adjusted Book Value, Liquidation Value, and Replacement Value. Earnings Based Valuation uses the Price/Earnings method, Earnings before Interest and Taxes, and /or Earnings before interest, taxes, depreciation, and amortization. The Cash-Flow Method is based on the concept of the Time Value of Money. It is future looking, and bases valuation on what the new owner could achieve. It also recognizes the buyers cost of capital.
I believe what I learned in this book will help me to communicate more effectively with my accountants and CFO, and help guide my business decisions.
