Dokument Import Review

ACCOUNTING

EXPLAINED

VISUALLY

50 SIMPLE INFOGRAPHICS THAT

DEMYSTIFY FINANCIAL STATEMENTS

BRIAN FEROLDI

Hello and Welcome!

Accounting is the language of business,

but it’s an imperfect language.

This eBook contains fifty infographics that

will help you better understand the

Balance Sheet, Income Statement, and

Cash Flow Statement.

Enjoy!

Brian Feroldi

(Click The Icons To Connect)

INDEX

GENERAL ACCOUNTING

13 Accounting Principles

Fundamentals of Accounting

Accounting Cycle

Financial Statements - Cheat Sheet

Financial Statements Connections

BALANCE SHEET

Balance Sheet Overview

Balance Sheet Synonyms

Questions to Ask

How To Analyze A Balance Sheet

Balance Sheet: Warren Buffett’s Rules of Thumb

4 Balance Sheet Ratios

Balance Sheet Vs Income Statement

Balance Sheet Vs Cash Flow Statement

Yellow Flags

Green Flags

INCOME STATEMENT

Income Statement Overview

Income Statement Synonyms

Questions to Ask

Income Statement Rules of Thumb

5 Key Metrics

Income Statement Vs. Cash Flow Statement

How The Income Statement & Balance Sheet Link

Yellow Flags

Green Flags

CASH FLOW STATEMENT

Cash Flow Statement Overview

Cash Flow Statement Synonyms

Questions to Ask

7 Cash Flow Ratios

Net Income Vs Free Cash Flow

Accrual vs Cash Accounting

Yellow Flags

Green Flags

EBITDA vs Free Cash Flow

OTHER ACCOUNTING

Gross Profit vs Gross Margin

6 Depreciation Methods

Financial Statements: Warren Buffett’s Rules of Thumb

Dupont Analysis

14 Profit Ratios Every Investor Should Know

GAAP vs Non-GAAP - Cheat Sheet

Debt Vs. Equity

EBITDA Explained Simply

Key Financial Ratios

20 Most Confused Finance Terms

Costs vs Expenses

Cash Conversion Cycle

Financial Statement Yellow Flags

Financial Statements Green Flags

P&L Statement Visualized

IFRS vs GAAP

Working Capital

GENERAL

ACCOUNTING

13 ACCOUNTING PRINCIPLES

BY BRIAN FEROLDI

ACCOUNTING PRINCIPLES

The rules, benchmarks, and procedures in the accounting field companies should

follow while reporting financial statements. In the United States, the common set of

accounting standards is GAAP (Generally Accepted Accounting Principles).

ECONOMIC ENTITY REVENUE RECOGNITION

Owner & business are two different Revenue should be recognized using

entities with separate liabilities. the accrual basis of accounting.

CONSERVATISM CONSISTENCY

When there are two acceptable

The usage of methods and principles

options for reporting, the less

should be consistent until another

favorable option should be chosen.

method proves to be better.

HISTORICAL COST FULL DISCLOSURE

All important information should be

Assets should be recorded based on

disclosed within the financial

their original purchased value.

statements or as a footnote.

GOING CONCERN MATCHING CONCEPT

Business is assumed to carry on

All debits should have a matching

forever with no intention of

credit, and all credits should have

liquidation.

a matching debit.

MATERIALITY MONETARY UNIT

Transactions that 

REVENUE Revenue is recorded at the All Tangible & Intangible items

ASSETS

RECOGNITION time of the transaction. owned by the company.

MATCHING Assets are recorded at their Amount the company owes

LIABILITY

PRINCIPLE acquisition cost. to others.

HISTORICAL Fiscal Year Income is compared Net Worth of Company,

EQUITY

COST with Calendar Year Expense. Assets - Liabilities.

FULL Full disclosure of all relevant Amount paid for purchases

EXPENSE

DISCLOSURE info is made available. made in the business.

Information in books should Amount earned by company

OBJECTIVITY INCOME

be true, relevant, & accurate. from sale of goods.

JOURNAL FINANCIAL STATEMENTS

Journal Entries consist of Debits

Income Statement: shows profit or loss

& Credits, the totals of which

during the period.

should be equal

Vs

Balance Sheet: a company’s assets,

liabilities, and equity at a particular time.

LEDGER

Journal are then transferred to Statement of Cash Flow: shows the inflow

appropriate Ledger Accounts and outflow of cash during period.

DOUBLE ENTRY • Each Accounting Entry will hare two sides - Debit and Credit.

SYSTEM

• The accounts used will be from any of above five categories.

THREE FIELDS OF ACCOUNTING TYPES OF ACCOUNTS

1. Financial Accounting: Preparing

Consists of tangible and

the Financial Statements. REAL

intangible assets.

2. Managerial Accounting: Preparing

Accounts for individual,

reports for internal use.

PERSONAL

group, entity, bank etc.

3. Cost Accounting: Measuring the

Accounts related to Gain,

performance of resources.

NOMINAL

Loss, Expense & Income.

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AACCCCOOUUNNTTIINNGG CCYYCCLLEE

BY BRIAN FEROLDI

STEP 1

STEP 10

STEP 2

Identify

Prepare journal

transactions

Prepare journal

entries

entries

STEP 9 STEP 3

Review post-

Record journal

closing trial

entries

balance

ACCOUNTING

CYCLE

STEP 8 STEP 4

Prepare trial

Cost closing

balance

entries

Make adjusting

Produce financial

Review adjusted entires

statements

trial balance

STEP 5

STEP 7

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FINANCIAL STATEMENTS

CHEAT SHEET

BALANCE SHEET INCOME STATEMENT CASH FLOW

PURPOSE PURPOSE PURPOSE

Track What it Owns & Owes Track Income & Expenses Track Cash Movement

SIMILAR TO SIMILAR TO SIMILAR TO

Your Net Worth Your Budget Your Checking Account

TIME TIME TIME

Point in Time Snapshot Period of Time Period of Time

ACCOUNTING ACCOUNTING ACCOUNTING

Accrual Accounting Accrual Accounting Cash Accounting

ADDITIONAL DETAILS ADDITIONAL DETAILS ADDITIONAL DETAILS

++ ++ ++

Assets must always exactly

Also called a “Profit & Has a start and end date.

equal Liabilities +

Loss“ statement or

Shareholder‘s Equity.

“P&L“. Begins with Net Income

from the Income Statement.

Cash Balance comes from

Has a start and end date.

ending balance on the Cash

Cash Flow From Operation

Flow Statement.

Net Income is added to minus Capital Expenditures

Retained Earnings on the equals Free

BALANCE SHEET SYNONYMS

BY BRIAN FEROLDI

NET WORTH STATEMENT STATEMENT OF FINANCIAL POSITION

FINANCIAL STATUS REPORT STATEMENT OF FINANCIAL CONDITION

Notes

Deferred Revenue

Deposits

Near Cash Cash Assets Senior Debt

Dividends Payable

Recoverable VAT

Liquid Assets Cash Reserves Creditors Current Debt Unearned Revenue

Notes Receivable

Marketable Securities Cash on Hand Supplier Debt Notes Payable Customer Deposits

Prepaid Expenses

Trade Creditors Bonds Payable Income Taxes Payable

Assets Held for Sale

Trade Payables Short-term Loans Accrued Interest Payable

Deferred Tax Assets

Due to Suppliers Convertible Notes Accrued Salaries and Wages

Dividends Receivable

Unpaid Expenses Convertible Senior Notes Current Maturities of Capital

Advances to Suppliers

Outstanding Bills Fixed Payment Obligations Lease Obligations

Short-term Investments

Trade Debtor Balances Accounts Payable Deferred Payment Other Accrued Liabilities

Income Taxes Receivable

Receivables Bills Receivable Accrued Expenses Obligations

Current Portion of Long-term

Outstanding Trade Debtors Outstanding Invoices Current Portion of Long-term

Investments

Invoices Receivables Debt

Current Portion of Loans

Receivable

Stock

Goods

Notes

Supplies

Senior Debt

Merchandise

Long-term Loans

Product Stock Convertible Notes

On-hand Goods Non-Current Debt

Warehouse Stock Subordinated Debt

Mortgages Payable

Long-term Financing

CDs Long-term Borrowings

Non-Current Liabilities

Bonds

Convertible Senior Notes

Stocks

Long-term Bonds Payable

Private Equity

Long-term Notes Payable

Investments

Fixed Payment Obligations

Venture Capital Long-term Lease Obligations

Investments Deferred Payment Obligations

Long-term Notes

Receivable

Investment in

Subsidiaries

Investment in Joint

Ventures

Pension Funds Deferred Credits

Intellectual Property Minority Interest

Investments Pension Obligations

Long-term Earn-outs

Commodity Holdings

Deferred Tax Liabilities

Infrastructure Funds

Post-retirement Health Care

Loans Receivable

Obligations

Real Estate

Long-term Capital Leases

Investments

Long-term Deferred Revenue

Long-term Provisions

Long-term Deferred

Compensation

Other Non-Current Liabilities

Long-term Contingent

Liabilities

Plant Hard Assets

Assets Fixed Capital

Property Capital Assets

Deficit

Fixtures Physical Assets Senior Equity

Earned Deficit

Facilities Tangible Assets Preferred Equity

Earned Surplus

Tangibles Property, Plant, and Preferred Shares

Retained Profit

Machinery Equipment (PP&E) Retained Deficit Preference Shares

Preferred Securities

Equipment Non-Current Assets Retained Capital Cumulative Preferred Stock

Plant Assets Long-term Assets Retained Losses Convertible Preferred Stock

Accumulated Profit Non-Convertible Preferred

Undistributed Profits Stock

Unappropriated Profit Participating Preferred Stock

Intangible Assets

Accumulated Earnings Preferred Dividend Stock

Financial Assets

Accumulated Retained

Deferred Ch

Business Reputation Value Property, Plant, and Ordinary Shares Accumulated Operating Company's Own Shares

Business Valuation Residual Equipment (PP&E) Founders' Shares Losses Shares in Treasury

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Balance Sheet

Q U E S T I O N S T O A S K

BY BRIAN FEROLDI

How much cash does the company have?

Are there accounts receivables? How much?

Is there any inventory? How much?

Is there any goodwill? How much?

What are the company's biggest assets?

Does the company have debt? How much?

Does the company have deferred revenue?

What are the company's biggest liabilities?

How has the company been funded?

Is there any preferred stock?

Are retained earnings positive and growing?

Is there any treasury stock?

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How To

BALANCE SHEET

Analyze A

By Brian Feroldi

A balance sheet shows you what a company OWNS and OWES

It’s like a company’s “Net Worth” statement

Assets = Liabilities + Shareholders Equity

Balance Sheet is a SNAPSHOT at a certain POINT IN TIME

ASSETS LIABILITIES

Shows everything the company OWNS. Shows everything the company OWES.

Two categories of assets: Current Assets Two categories of liabilities: Current

and Long-Term Assets. Liabilities and Long-Term Liabilities.

Current Assets: Assets that are expected to be Current Liabilities: An obligation due in less

used thin 1 year. than 1 year.

Long-Term Assets: Assets that expected to last Long-Term Liabilities: An obligation due in

longer than 1 year: greater than 1 year.

Cash & cash equivalents

Most Liquid

SHAREHOLDER’S EQUITY

Marketable securities

Financial assets

A company's net worth.

Accounts receivable

The dollar amount that would be returned

Inventory

to the owners if the company was

Plant, property & equipment

liquidated.

Intangible assets

Least Liquid Shareholder’s Equity = Assets – Liabilities

Goodwill

HOW TO ANALYZE A BALANCE SHEET

Questions Yellow Flags

1: How much CASH does the company have? 1: CASH & CASH EQUIVALENTS → Less Than Total Debt

2: Are there any ACCOUNTS RECEIVABLE? 2: ACCOUNTS RECEIVABLE → Rising Faster Than Revenue

3: Is there any GOODWILL? How much? 3: INVENTORY → Rising Faster Than Profits

4: What are the biggest liabilities? 4: GOODWILL → More Than 50% of Total Assets

5: Does the company have any DEBT? What kind? 5: INTANGIBLE ASSETS → More Than 50% of Total Assets

6: Is there any PREFFERED STOCK? 6: SHORT-TERM & LONG-TERM DEBT → More Than Cash

7: Are RETAINED EARNINGS positive? Is it growing? 7: PREFERRED STOCK → There Shouldn’t Be Any

8: Is there any TREASURY STOCK? 8: RETAINED EARNINGS → A Negative Number

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WARREN BUFFETT’S

BALANCE SHEET RULES OF THUMB

BY BRIAN FEROLDI

Metric: Equation: Rule:

More Cash

Cash & Debt Cash > Total Debt

Than Debt

Total Liabilities

Adjusted Debt

Shareholder Equity + Below 0.80

to Equity

(Treasury Stock)

Preferred Stock Preferred Stock None

Recession -

Reta

Antifragile = <10%

Ratio organically?" Assets

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IINNCCOOMMEE

BBAALLAANNCCEE

SSTTAATTEEMMEENNTT

SSHHEEEETT

BRIAN FEROLDI

PURPOSE PURPOSE

Track What it Owns & Owes Track Income & Expenses

SIMILAR TO

SIMILAR TO

Your Net Worth Your Budget

TIME TIME

Point in Time Snapshot Period of Time

ACCOUNTING ACCOUNTING

Accrual Accounting Accrual Accounting

++

ADDITIONAL DETAILS ++

ADDITIONAL DETAILS

Assets must always exactly equal Liabilities +

Shareholder‘s Equity.

Also called a “Profit & Loss“ statement or “P&L“.

Cash Balance comes from the ending balance on the

Has a start and end date.

Cash Flow Statement.

Net Income is added to Retained Earnings on the

Retained Earnings balance comes from last period's

Balance Sheet minus any Dividend Payments.

Balance Sheet plus this month's Net Income on your

Income Statement minus any Dividends Paid.

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BBAALLAANNCCEE CCAASSHH FFLLOOWW

SSHHEEEETT SSTTAATTEEMMEENNTT

BRIAN FEROLDI

PURPOSE PURPOSE

Track What it Owns & Owes Track Cash Movements

TIME TIME

Point in Time Snapshot Period of Time

ACCOUNTING ACCOUNTING

Accrual Accounting Cash Accounting

++ ++

ADDITIONAL DETAILS

ADDITIONAL DETAILS

Assets must always exactly equal Liabilities +

Ending cash balance becomes Cash on the Balance

Shareholder‘s Equity.

Sheet

Cash Balance comes from ending balance on the Cash

Begins with Net Income from the Income Statement

Flow Statement.

Retained Earnings balance comes from last period's Cash Flow From Operation minus Capital Expenditures

Balance Sheet + this month's Net Income on your equals Free Cash Flow

Income Statement.

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8 BALANCE SHEET

YYEELLLLOOWW FFLLAAGGSS

BRIAN FEROLDI

1: Less Than

3: Rising Faster

Total Debt 2: Rising Faster 4: More Than

Than Profits

Than Revenue Cash

6: Intangibles > 50%

8: A Negative

of Total Assets

Number

5: More Than 50% of 7: There Shouldn’t

Total Assets Be Any

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BALANCE SHEET

10

GREEN FLAGS

BRIAN FEROLDI

2: No Accounts

4: Current

Receivables

Liabilities Less

5: No Short-Term

Than Cash

or Long Term

1: More Cash 3: No Inventory

Debt

Than Debt

6: Goodwill Less

8: Retained

10: Deferred

Than 10% of Total

Earnings Positive

Revenue

Assets

& Growing

7: No Preferred

9: Treasury Stock

Stock

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INCOME

STATEMENT

IINNCCOOMMEE SSTTAATTEEMMEENNTT

EXPLAINED SIMPLY

Total Value Of All Sales After

Discounts During Period

Total Cost To Produce

Product/Service

Total Profit From Selling

Product/Service

All Overhead Costs Such As

Salaries, Rent, & Marketing

Profits From

Operating Business

Income/Expenses Not From

Operating Business

Total Income

Before Taxes

Total Taxes Paid

Profits Available

To Shareholders

Total Shares A

Company Has Issued

Each Shares’

Claim O

Operating Profit

Operational Expenses

Operating Earnings

Business Expenses

Operating Margin

Earnings Before Interest

Other Income / Expense

and Taxes (EBIT) Interest Income / Expense

Operating Cash Flow Secondary Income / Expense

Business Income Incidental Income / Expense

Extraordinary Items

Earnings Before Tax (EBT)

Tax on Income

Income Before Tax

Revenue Tax

Profit Before Tax (PBT)

Operating Profit Before Tax Earnings Tax

Earnings Before Income & Fiscal Charge on Income

Taxes (EBIT) Corporate Income Tax

Pretax Earnings Direct Tax

Pretax Profit

Earnings

Net Earnings

Net Profit

Bottom Line

Profits Issued Shares

Income EPS Basic Shares Outsanding

Net Income After Taxes Diluted shares Outstanding

Net Income Per Share

Profit After Tax (PAT) Fully Diluted Shares Outstanding

Profit Per Share

Earnings After Tax (EAT) Outstanding Stock

Net Income Before Outstanding Equity

Extraordinary Items Outstanding Shares of Stock

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Income Statement

Q U E S T I O N S T O A S K

BRIAN FEROLDI

Does revenue consistently

grow?

What is the gross margin?

Is the gross margin stable?

Expanding? Contracting?

Why?

Are there research +

development expenses?

Are there selling + marketing

expenses?

What are the company's

biggest operating expenses?

What is the company

operating margin?

Does the company have any

non-operating expenses?

What is the company net

profit margin?

Is the company profitable on

a Non-GAAP basis?

Is the company

profitable on a

GAAP basis?

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WARREN BUFFETT’S

INCOME STATEMENT RULES OF THUMB

BY BRIAN FEROLDI

METRIC: EQUATION: RULE OF THUMB:

Gross Gross Profit

>40%

Margin Revenue

SG&A SG&A

<30%

Margin Gross Profit

R&D R&D

<30%

Margin Gross Profit

Depreciation Depreciation

<10%

Margin Gross Profit

Interest Interest

<15%

Margin Operating Income

Tax Taxes Corporate

Margin Pre-Tax Income Tax Rate

Net Income Net Income

>20%

Margin Revenue

EPS Year 2 EPS Positive &

Growth Year 1 EPS Growing

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INCOME STATEMENT

55 KKEEYY MMEETTRRIICCSS

BY BRIAN FEROLDI

METRIC: FORMULA: WHAT:

SALES GROWTH

Companies are either growing or dying — there isn’t a

YEAR 2 SALES

third direction. Great companies consistently grow

YEAR 1 SALES

their revenues by at least 5% per year.

GROSS MARGINS (REVENUE -

A stable or rising Gross Margin is a sign that a

COST OF GOODS SOLD)

company has negotiating power with suppliers and

REVENUE

pricing power with customers.

OPERATING

REVENUE GROWTH RATE "Operating Leverage" means profits can grow FASTER

LEVERAGE

than revenues. A $1 increase in revenue leads to more

VS

than a $1 increase in profits. This happens when

PROFIT GROWTH RATE revenue grows faster than expenses.

DEBT COVERAGE

Good companies can easily cover their interest

INTEREST EXPENSE

expense. A rule of thumb is this ratio should be under

OPERATING INCOME

25%.

Also called a “Profit & Loss“ statement or “P&L“ Has a start and end date

Has a start and end date, usually a quarter or year Begins with Net Income from the Income Statement

Net Income is added to Retained Earnings on the Cash Flow From Operation minus Capital

Balance Sheet. Expenditures equals Free Cash Flow

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INCOME STATEMENT

HOW

THE

& BALANCE SHEET

LINK

BY BRIAN FEROLDI

INCOME STATEMENT

ITEM EXPLANATION

Accountant's estimate of the sales generated

Start

Revenues by any transactions made the business

With

during the period.

OPERATING

Include all expenses associated with

EXPENSES

Operating

Net Out operation this year, with no benefits spilling

Expenses

over into future years.

WRITTEN OFF AS Operating

To Get Operating profitability of business.

DEPRECIATION Profit

OR AMORTIZATION

Financial Subtract non-operating expenses (interest FINANCING

OVER LIFE OF ASSET

Net Out Income & payments on debt). Add non-operating EXPENSES

Expenses income (interest income, equity investments).

Taxable

ADD / SUBTRACT To get Income to equity investors before taxes.

Income

BORROWINGS ON

NON-OPERATING

BALANCE SHEET

INCOME /

Net Out Taxes Taxes, based upon taxable income.

EXPENSES

To get Net Income Income to equity investors, after taxes.

NON-OPERATING

BALANCE SHEET

EXPENSES

ASSETS LIABILITIES

Current Current

SHORT LIVED ASSETS SHORT TERM OBLIGATIONS

Assets Liabilities

LONG LIVED Fixed

Debt LONG TERM DEBT

PHYSICAL ASSETS Assets

INVESTEMENTS IN Financial Other

OTHER LONG TERM

SECURITIES & OTHER

Assets Liabities OBLIGATIONS

BUSINESS

NET

INCOME

Intangible

ASSETS WHICH ARE NOT Equity

SHAREHOLDERS' EQUITY

PHYSICAL Assets

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6

INCOME STATEMENT

YYEELLLLOOWW FFLLAAGGSS

BRIAN FEROLDI

1: Growth Rate

Suddenly

Plunges

2: Gross Margin

Declining

3: Marketing

4: Goodwill

Expense Rise

Faster Than Writedown

Revenue

6: Tax Rate

Consistently

Lower Than

Home Country

5: Dilution Corporate Rate

Execessively

High

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10 INCOME STATEMENT

GREEN FLAGS

BRIAN FEROLDI

1: Accelerating

Revenue Growth

2: Gross Margin

Expands

3: Operating Expenses

Grow Slower Than

Revenue

4: Operating

Margin Expands

5: Interest Income

> Interest Expense

6: Pre-Tax Margin

Expands

7: Income Tax

Rate Near 21%

8: Net Income

Grows Faster

Than Revenue

9: Shares 10: Earnings Per

Outstanding Share Grows Faster

Than Revenue

Declines

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CASH FLOW

STATEMENT

CASH FLOW STATEMENT

EXPLAINED SIMPLY

Start & End Date

From Income Statement

Depreciation, Amortization, Stock-based Compensation

Receivables, Payables, & Inventory

Total Cash Generated From Operations

Cash Spent on Buildings & Equipment

Cash Paid to Acquire Other Busineses

Cash Proceeds From Asset Sales

To

Income Profit After Tax (PAT) Depreciation Amortization

Earnings Net Income After Taxes Stock-based Write-downs

Net Profit Earnings After Tax (EAT) Compensation Deferred Taxes

Unrealized Gains Provisions for Losses

and Losses Impairment Charges

Non-Cash Interest

Expense

Stock Liabilities

Credit Provisions

Accruals Inventories

Payables Receivables OCF Operating Activities

Prepayments Cash Profit Cash from Operations

Cash Earned Cash Generated from

Cash Income Operations

Operating Cash Net Cash from

Operating Activities

Capex Facilities Spend

PPE Spend Equipment Spend

Asset Buys Investment Spend Merger Asset Acquisition

Plant Outlay Infrastructure Takeover Company Purchase

Infrastructure Spend Purchase Business Purchase

Outlay Property, Plant, and Asset Buy Corporate Acquisition

Property Spend Equipment Consolidation

Sale Gain Liquidation Investing Cash Cash Flow from

Disposal Investment Investment Flow Investments

Asset Sale Sale Investment Outlay Net Cash Used

Divestiture Divestment Cash from Investing in Investing

Sale Proceeds Proceeds Investing Cash Flows Activities

Capital Returns Investment Cash Used in Investing

Disposal of Liquidation

Investments Proceeds from

Stock Sale

Proceeds from Investment

Equity Issue

Sales of Assets Disposal

Issuing Shares

Equity Buyback

Debt Issue Share Buyback

Debt Raised Stock Issuance

Loan Issuance Equity Offering

Bond Issuance Share Issuance

Stock Redemption

Debt Refinance

Share Redemption

Debt Retirement

Equity Redemption

Debt Repayment

Equity Repurchase

Loan Repayment Stock Repurchase

Bond Repayment Share Repurchase

Debt Issuance/Repayment Issuance of Shares

Debt Pay-down Payouts Payment of Dividends Finance Cash Repurchase of Shares

Dividends Dividend Remittance Funding Cash Repurchase of Stock

New Debt Issued

Dividend Outlay Dividend Disbursement Financing Flow Redemption of Shares

Issuance of Debt

Profit Distribution Dividends to Fund Injections Issuing Common Stock

Issuance of Bonds

Dividend Payment Shareholders Funding Activities Issuance of Common

Repayment of Debt Stock

Dividend Allocation Distribution to Financial Activities

Borrowing Activities Repayment of Share

Distribute Earnings Shareholders Financing Activities

Repayment of Loans Capital

Debt Financing Activities Dividend Cash Dividend Payment Cash from Financing Issuance of Equity

Distribution Disbursement of Financing Cash Flow Interests

Payments on Borrowings

Proceeds from Issuance of Shareholder Dividends Cash Flow Financing Repurchase of Equity

Debt Dividends Allocation of Dividends Net Financing Cash Flow Interests

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Cash Flow Statement

Q U E S T I O N S T O A S K

BRIAN FEROLDI

Did the company generate

positive Net Income?

Does the company have high

depreciation expense?

What are the biggest non-

cash charges?

Is stock-based compensation

high or low?

How do changes in working

capital affect cash flow?

Are capital exp

pay off its current

Free cash flow is compared to trailing 12-

month sales. It shows how much cash a liabilities using its

company generates after deducting all capital operating cash flow.

expenditures.

PRICE TO

5 CASH FLOW RETURN ON 44

CASH FLOW RATIO

INVESTMENT

A company's stock price is

Present value of cash flows

compared to its operating cash

divided by invested capital. It

flow per share. It shows how much

shows the return on investment

investors are willing to pay for

generated by a company's cash

each dollar of operating cash flow.

flow.

66 DEBT TO OPERATING CASH 77

CASH FLOW MARGIN

FLOW RATIO

Operating cash flow compared to

Total debt is compared to operating

revenue. It shows how much of

cash flow. It shows how many years it

each dollar of revenue is

would take for a company to pay

converted into cash flow.

off its debt using its operating cash flow.

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NNEETT

FFRREEEE

IINNCCOOMMEE CCAASSHH FFLLOOWW

BRIAN FEROLDI

ACCOUNTING ACCOUNTING

Accrual Accounting Cash Accounting

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ACCRUAL CASH

AACCCCOOUUNNTTIINNGG

BRIAN FEROLDI

ACCRUAL CASH

METHOD METHOD

WHAT IT FOCUSES ON: WHAT IT FOCUSES ON:

Income Earned vs Cash Inflow vs

Expenses Incurred Cash Outflow

USED ON: USED ON:

Income Statement

Cash Flow Statement

& Balance Sheet

PROS: PROS:

GAAP Compliant

Easy to create

Provides a smoothed-out

More natural accounting

view of expenses & profits

CONS: CONS:

Might not accurately show the

Results can be lumpy

cash flow of a business

Readers may not grasp

More time-consuming to

the full picture of what is

create

happening in the business

Understates revenues of

Not compliant with GAAP

businesses that charge

accounting

upfront

USED BY: USED BY:

Large businesses

Small businesses

& public copmanies

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8

CASH FLOW STATEMENT

YYEELLLLOOWW FFLLAAGGSS

BRIAN FEROLDI

1: Negative

2: Stock-Based

Net Income

Compensation

More Than 10%

of Net Income

3: Operating

Cash Flow

Lower Than

Net Income

4: Free Cash

5: Capital Flow

Expenditures Lower Than

More Than 25% Net Income

of Net Income

6: Excessive

Debt Issuance

7: Excessive

Stock Issuance

8: Cash

Balance

Declining

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9 CASH FLOW STATEMENT

GREEN FLAGS

BRIAN FEROLDI

1: Net Income 2: Stock-Based

Positive & Compensation

Growing Less Than 10%

of Net Income

3: Operating

Cash Flow

Higher Than

Net Income

4: Free Cash

Flow Higher

5: Capital

Than

Expenditures

Net Income

Less Than 25%

of Net Income

6: Debt

Reduction

77:: SSttoocckk

RReeppuurrcchhaassee

8: Dividends

Paid

9: Cash

Balance

Increases

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EBITDA

FCF

BY BRIAN FEROLDI

EARNINGS BEFORE INTEREST, TAXES, FREE CASH FLOW

DEPRECIATION & AMORTIZATION

NET INCOME NET INCOME

DEPRECIATION AND AMORTIZATION 

33.. Proxy for Cash Generation: EBITDA is often used

33.. Hard To Manipulate: FCF is much harder for a

as a fast way to measure a company's ability to

management team to manipulate than EBITDA

generate cash from its core operations.

or Net Income

CONS CONS

11..Ignores Non-Operating Expenses: EBITDA 11.. Complexity: There are many varieties of FCF, which

excludes important expenses such as interest, can make them time-consuming to calculate

taxes, depreciation, and amortization. 22.. Volatility: FCF can fluctuate widely from year to

22.. Lack of Cash Flow Information: EBITDA does not year due to changes in working capital needs and

provide accurate insights into a company's ability capital expenditure spending cycles.

to generate cash. 33.. Limited Comparability: Comparing FCF across

33.. Susceptible to Manipulation: EBITDA can be industries is challenging due to differences in

manipulated by adjusting accounting practices, accounting practices and capital structures.

making it less reliable.

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OTHER

ACCOUNTING

GG RR OO SS SS

GG RR OO SS SS

PP RR OO FF II TT

MM AA RR GG II NN

BRIAN FEROLDI

GROSS PROFIT GROSS MARGIN

WHAT WHAT

The difference between total A profitability ratio that

revenue and cost of goods sold. shows the percentage of sales

that become gross profit.

FORMULA FORMULA

(REVENUE - COST OF GOODS SOLD)

REVENUE - COST OF GOODS SOLD

REVENUE

RESULT RESULT

The amount of revenue remaining

The percentage of each dollar of

after all costs to produce the

product or service have been sales that becomes gross profit.

subtracted.

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66 Depreciation Methods

BY BRIAN FEROLDI

DEPRECIATION

Depreciation is an accounting method used to allocate the cost of tangible assets (such as

buildings. machinery, and vehicles) over their useful lives. It represents the systematic

reduction in the value of an asset due to wear and tear, obsolescence, or other factors.

TYPE DESCRIPTION FORMULA

The most common and easiest method. Simply

Cost

STRAIGHT - LINE divide the cost of an asset by its estimated useful

Useful Life

life (in years).

Opening book value

DECLINING Used to calculate large depreciation expenses or Depreciation rate (%)

assets that quickly lose value. Multiply the

BALANCE

opening book value by the depreciation rate. 100%

Useful Life of asset

Opening book value

Used when a larger depreciation value is needed

DOUBLE

in the first years of an asset’s life. The method Depreciation rate (%)

DECLINING differs from regular declining balance

depreciation only in the fact that depreciation 100%

BALANCE 2

rate is multiplied by 2.

Useful Life of asset

An accelerated depreciation method makes the

SUM - OF - THE - Useful life

expense higher in the early years and lower in the Cost

Sum of the

latter years. Multiply the cost of an asset by its

YEARS DIGITS

years digits

METRIC EQUATION THRESHOLD

Gross Gross Profit

>40%

Margin Revenue

SG&A SG&A

<30%

Margin Gross Profit

R&D R&D

<30%

Margin Gross Profit

Depreciation

Depreciation Margin <10%

Gross Profit

INCOME

Interest Interest

STATEMENT

<15%

Margin Operating Income

Corporate

Tax Taxes

Margin Pre-Tax Income Tax Rate

Net Income Net Income

>20%

Margin Revenue

Positive &

EPS Year 2 EPS

Growth Year 1 EPS Growing

Cash & Debt Cash > Debt Cash > Debt

Total Liabilities

Adjusted Debt to Equity Shareholder Equity + Below 0.80

Treasury Stock

BALANCE

Preferred Stock NONE NONE

SHEET

Consistent

Year 2 Retained Earnings

Retained Earnings

Year 1 Retained Earnings Growth

Treasury Stock Treasury Stock > 1 Exists

CASH FLOW Capex

Capex Margin <25%

STATEMENT Net income

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1100

KKPPIISS

EVERY INVESTOR

SHOULD KNOW

BY BRIAN FEROLDI

KPI FORMULA DETAILS

Recurring revenue is more valuable than Non-Recurring

RECURING RECURRING REVENUE

Revenue due to its predictability and stickiness.

REVENUE SPLIT The higher the % of recurring revenue, the higher the

TOTAL REVENUE

valuation multiple should be.

Gross Margin tells you how much revenue you get to keep

GROSS PROFIT

after paying for the production of your product or service.

GROSS MARGIN

The higher the Gross Margin, the more profit you keep for

REVENUE

each dollar in sales.

NET PROFIT Net Profit Margin shows how much profit is left after ALL

NET INCOME

costs and expenses have been deducted from revenue.

MARGIN REVENUE

The higher the NPM, the more profitable your business.

Lifetime Value (LTV) measures how much gross profit each

customer contributes to your bus each

GROSS PROFIT SINCE INCEPTION

LIFETIME VALUE

LTV is driven by (1) profitability per transaction and (2)

# OF CUSTOMERS

number of transactions per customer.

Increase both to increase LTV.

CUSTOMER

Customer Acquisition Cost (CAC) shows how much it costs

MARKETING + SALES COSTS to acquire a new customer.

ACQUISITION

# OF CUSTOMERS ACQUIRED Compare your LTV to your CAC. Ideally you should have

COST an LTV:CAC > 3.

DAYS SALES Measures how quickly your customer pays their bills.

ACCOUNT RECEIVABLES

X 365 DAYS

If Days Sales Outstanding (DSO) is higher than your credit

OUTSTANDING SALES

terms allow, you have a collection problem.

DAYS PAYABLE ACCOUNT PAYABLES Measures how quickly your customer pays their bills.

X 365 DAYS

Ideally, Days Sales Outstanding (DSO) < Days Payables

COGS

OUTSTANDING

Oustanding (DPO).

Measures how quickly you are burning through your cash

CASH & CASH EQUIVALENTS

reserves.

CASH BURN RATE

Especially important in the early stages of a business or

MONTHLY EXPENSES

when there is a significant disruption in the market.

Measures whether you can meet your short-term

CURRENT ASSETS

obligations.

CURRENT RATIO

If the Current ratio is below 1, it could indicate that your

CURRENT LIABILITIES

business is in financial difficulty.

GROSS REVEN

Income Assets

Year 1 Year 2

ProfitCo

Net Income $1,000 $1,200

Revenue $10,000 $10,000

Profit Margin 10% 12%

Revenue $10,000 $10,000

Average Assets $5,000 $4,800

Asset Turnover 2 2.08

Average Assets $5,000 $4,800

Average Equity $2,000 $2,000

Financial Leverage 2.5 2.4

50% 60%

ROE

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14 Profit Ratios

BY BRIAN FEROLDI

WHAT FORMULA

Gross Profit

GROSS MARGIN Percentage of Revenue that becomes Gross Profit.

Sales

Percentage of Sales that becomes Earnings Before

EBITDA

EBITDA MARGIN Interest,

Sales

Taxes, Depreciation, and Amortization (EBITDA).

Operating Income

OPERATING MARGIN Percentage of Sales that becomes Operating Income.

Sales

Percentage of Sales that becomes Earnings Before EBIT

EBIT MARGIN

Interest & Taxes (EBIT) are subtracted. Sales

EBT MARGIN (PRE-TAX

Percentage of Sales that becomes Earnings Before Taxes EBT

MARGIN) (EBT), also known as the Pre-Tax Profit. Sales

Percentage of Sales that becomes Earnings (Net Income) Net Income

NET PROFIT MARGIN

after all costs are subtracted. Sales

FREE CASH

Percentage of Sales that becomes Free Cash Flow Free Cash Flow

FLOW MARGIN (Cash Flow From Operations - Capital Expenditures). Sales

EARNINGS PER SHARE

How much Profit (Net Income) a company makes on Net Income

(EPS) a Per Share Basis. Shares Outstanding

RETURN ON

Net Income

How much Profit a company generates from its Assets.

ASSETS (ROA) Total Assets

RETURN ON

Measures how Profit a company generates in relation to Net Income

EQUITY (ROE) its Equity (the money shareholders have invested.) Equity

Measure how much Net Operating Profit After Tax

RETURN ON INVESTED

NOPAT

(NOPAT) a company generates in relation to its Invested

CAPITAL (ROIC) Total Invested Capital

Capital.

Measures how much Earnings Before Interest & Taxes

RETURN ON CAPITAL

EBIT

(EBIT) a company generates in relation to its Long Term

EMPLOYED (ROCE) Long-Term Debt + Equity

Debt & Equity.

FREE CASH FLOW

Free Cash Flow

Measures how much Net Income becomes Free Cash Flow.

CONVERSION Net Income

Net Income + (Depreciation &

OWNER'S

Measures how much cash can be taken out of the Amortization) +/- Non Cash

EARNINGS business and given to owner. Charges - Maintenance Capex +/-

Changes in Working Capital

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G A A P V S N O N - G A A P

A C C O U N T I N G

BRIAN FEROLDI

Non-

GAAP

GAAP

Audited? Yes No

Standardized? Yes No

Usually

Stock-Based Compensation Included

Excluded

Non-Recurring Charges

Acquisition Expenses

Currency Movements

Early Debt Redemption Costs

Usually

Fines/Penalties

Included

Litigation

Excluded

Pension

Relocation Expenses

Restructuring Charges

Unusual Taxes

Paper Gains/Losses Usually

Included

On Investments Excluded

EBITDA? No Yes

Profits Usually Look Worse Better

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EEQQUUIITTYY

DDEEBBTT

BRIAN FEROLDI

WHAT DEBT IS WHAT EQUITY IS

Money le

When issuing When issuing

debt... equity...

Credit: Common Stock /

Credit: Debt

Preferred Stock

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BY BRIAN FEROLDI

Dividends

(To Owners)

TBE

TAE

ER

EEBBIITTDDAA EXPLAINED

SIMPLY

Gross Profit = Revenue -

Net Income COGS (Cost of Goods Sold)

WHAT IS EBITDA?

+ Interest Operating Profit = EBIT

EBITDA = Earnings

(Earnings Before Interest

Before Interest, Taxes, + Taxes =EBITDA and Taxes)

Depreciation

Net Profit = EAT (Earnings

+ Depreciation

& Amortization

After Taxes)

+ Amortization

Retained Earnings = RE

EBITDA

A major financial

Requires information It does not take into

indicator used for

from the company's account all business

evaluating the

Income Statement and activities and it might

profitability of companies

Cash Flow Statement. overstate cash flow.

with different capital

structures.

)EUNEVER(

SELAS

TIFORP

SSORG

ADTIBE

TIBE

Cost of Goods Sold (To Suppliers)

General Expenses (To Employees)

Equipment Depreciation &

Intangible Amortization

Interest (To Creditors)

Taxes

(To Government)

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Key Financial Ratios

BRIAN FEROLDI

IDEAL

CATEGORY RATIO FORMULA EXPLANATION

RANGE

Inventory Cost of Goods Sold Measures how many times a company's

Varies

Turnover Average Inventory inventory is sold and replaced over a period

Efficiency

Ratios

Asset Sales Measures a firm's efficiency at using its assets in

Varies

Turnover Total Assets generating sales or revenue

Current Current Assets Measures a company's ability to pay

1.5 - 2.0

Ratio Current Liabilities short-term obligations

Liquidity

Ratios

Quick (Current Assets - Inventory) Another liquidity ratio, but excludes inventory

1.0 - 1.5

Ratio Current as it is less liquid

Coverage

Interest Coverage EBIT Measures how easily a company can pay interest

> 1.5

Ratios Ratio Interest Expenses expenses on its outstanding debt

Return on Net Income Measures how efficiently a company uses is

> 5%

Assets (ROA) Total Assets assets to generate income

Return on Net Income Measures how efficiently a company uses its

> 15%

Profitability Equity (ROE) Shareholder's Equity equity to generate income

Ratios

Gross Gross Profit Measures how much out of every dollar of sales

> 40%

Margin Revenue a company actually keeps as gross profit

Net Profit Net Income Measures how much out of every dollar of sales

> 10%

Margin Revenue a company actually keeps in earnings

30% -

Dividend Payout Dividends Measures what proportion of earnings are paid

Dividend Ratio Net Income to shareholders as dividends 70%

Ratios

Dividend Annual Dividends per Share Shows how much a company returns in

2% - 4%

Yield Price per Share dividends each year relative to its share price

Leverage

Debt to Total Debt A leverage ratio that compares a company's

< 2.0

Ratios Equity Ratio Total Equity total debt with its total equity

Positive

Earnings Per Net Income Measures the p

deducting all expenses. product & service sales. acquire, upgrade, and the business.

maintain physical assets.

ACCRUAL CASH ACCOUNTING MARKET CAP ENTERPRISE VALUE

Recording revenues and Recording revenues and Total value of a Total value of a company,

expenses when they are expenses only when cash is company's outstanding including debt and excluding

incurred, regardless of when

exchanged. shares. cash.

cash is exchanged.

ASSETS LIABILITIES GROSS MARGIN NET MARGIN

All resources owned and All obligations a company Revenue minus cost of goods Net profit divided by

controlled by a company. owes to others. sold, divided by revenue. revenue.

RETURN ON RETURN ON FINANCIAL OPERATING

INVESTMENT EQUITY LEVERAGE LEVERAGE

Measures profitability Measures profitability The use of debt in capital The use of fixed vs. variable

relative to total relative to shareholders’ structure to amplify net expenses to amplify

investment. equity. income. operating income.

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COSTS VS EXPENSES

BY BRIAN FEROLDI

COSTS EXPENSES

DEFINITION DEFINITION

The value of resources The outflow of

used to produce goods resources to generate

or services. revenue.

TIMING TIMING

Incorporated in Incorporated throughout

cost of goods sold. the income statement.

NATURE NATURE

Direct costs associated Includes direct and

with production. indirectt expenses.

VARIABILITY VARIABILITY

Can be fixed or Can be fixed or

variable. variable.

PERIODICITY PERIODICITY

Tied to production Incurred over time, not

activities, occurring necessarily tied to

during manufacturing. production.

APPLICATION APPLICATION

Refers to the production Encompasses a broad

of goods or delivery of rage on business

services. expenditures.

MANAGEMENT MANAGEMENT

Emphasizes optimizing Focuses on managing

production and operational

procurement costs. expenditures.

REVENUE REVENUE

Linked to the production Often incurred to

of goods or services for support the generation

sale. of revenue.

CLASSIFICATION CLASSIFICATION

Variable Operating or Non-

or Fixed costs. Operating

Costs and Expenses are both business Expenditures.

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CASH CONVERSION CYCLE

BRIAN FEROLDI

The Cash Conversion Cycle (CCC) evaluates

how efficiently a company manages working capital

CCC measures how long cash is tied up in working capital

(RECEIVABLES + INVENTORY - PAYABLES)

INVENTORY

Days

Inventory

Outstanding

ACCOUNTS ACCOUNTS

PAYABLE RECEIVABLES

Days

Days

Accounts

Accounts

Payable Receivable

Outstanding Outstanding

CASH

DAYS INVENTORY OUTSTANDING (DIO) Purchase Inventory Pay Supplier for Sell Inventory Collect Payment

from Supplier Inventory to customer from customer

( Average Inventory )

Number of Days

Cost of Good Sold

Cash Out Cash In

DAYS SALES OUTSTANDING (DSO) Days Inventory

DIO

( Average Accounts Receivable ) Outstanding

Number of Days

Total Credit Sales Days Sales DSO

Outstanding

DAYS PAYABLE OUTSTA

Retained Earnings Excessive

Expenses

Are Negative Dilution

Rising Faster Than Revenue

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FINANCIAL STATEMENTS

GREEN FLAGS

BRIAN FEROLDI

INCOME

CASH FLOW

STATEMENT

STATEMENT

BALANCE

SHEET

More Cash Than Debt

No Accounts Receivables

No Inventory

Goodwill Less Than 10% of

Accelerating Revenue

Total Assets

Growth

Net Income Positive &

Current Liabilities Less

Gross Margin Expansion

Growing

Than Cash

Operating Expenses

Stock-Based

Growing Slower Than No Short-Term or Long

Compensation Less Than

Revenue

Term Debt 10% of Net Income

Operating Margin Expands

Deferred Revenue Operating Cash Flow

Interest Income Exceeds

Higher Than Net Income

No Preferred Stock

Interest Expenese

Capital Expenditures

Retained Earnings Positive

Pre-Tax Margin Expands

Less Than 10% of Net

Income Tax Rate Near 21% & Growing

Income

Net Income Grows Faster Treasury Stock

Free Cash Flow Higher

Than Revenue

Than Net Income

Shares Outstanding

Stock Repurchase

Declines

Dividends Paid

Earnings Per Share

Cash Balance Increase

Consistently Grows

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BY BRIAN FEROLDI

D&R

A&GS

PP&&LL SSTTAATTEEMMEENNTT

VISUALIZED

PROFIT AND LOSS STATEMENT

Costs of Goods Sold

(To Suppliers & Manufacturing Employees)

Research & Development Expense

(To Engineering & Research Employees)

Cost of Interest on Debt

(To Banks & Bond Holders)

Tax Expense

(To Governments)

e

C R o e s v t e o n f u G o o d a s r G S c r o h o l d s & s D P r e a r v o l, e f & i l t o A p d m m e i n n O t i s p r e a r t a i v t I i e n n g t e P r E e r a s o r t f n i E t i x n p g e s n B s e e f o r e I T n a c x o m e N T e a t x I n c o m e

e e

s n

e e

R G

g,

n

elli

S

euneveR

SGOC

PG PO

TBE

IN

Selling, General, & Administrative Expense

(All Remaining Overhead Expenses)

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IIFFRRSS GGAAAAPP

BRIAN FEROLDI

DATA SOURCE:

IFRS GAAP

FINANCIAL STATEMENTS PRESENTATION

INCOME STATEMENT 2 years allowed 3 years required

Increasing order of liquidity. Decreasing order of liquidity.

BALANCE SHEET

Current before non-current Non-Current before current.

CASH FLOW Flexibility with location of interest expense, Interest expense, interest income and dividends received in

Cash from Operations; bank overdrafts are classified as

STATEMENT interest income and dividends financing activities

IMTERIM REPORTS Each interim period is an integral part of fiscal year Each interim period is an integral part of fiscal year

The accounting policies for subsidiaries do not need to be

ACCOUNTING

The accounting policies for subsidiaries need uniform. However variations in accounting policies should be

POLICIES to be uniform disclosed in consolidated financial statements.

RECOGNITION AND CLASSIFICATION

RESEARCH & Development is capitalized when specific conditions are All R&D is expensed, exceptions include software for

DEVELOPMENT COST met. Re

Push-down accounting is not allowable; there is an Push-down accounting is required in certain

option to record Non Controlling interest at its circumstances for public companies and is optional

CONSOLIDATION

proportionate interest in the net assets or at fair for private companies; non-controlling interest (NCI)

market value to be recorded at fair market value

MEASUREMENT

LIFO allowed with other methods, Method can vary across

LIFO not allowed, Same method required with Inventory of Inventory groups. This cost method is used primarily for oil

INVENTORIES similar nature; write- backs of previously recognised write and gas companies to minimise taxable income. No permit

downs to net realisable value. Same measurement formula is write-backs of previously recognised write-downs to net

required to the all inventories of same nature realisable value. Not required that an entity use the same

formula for all inventories.

IRS allows companies to elect fair value treatment of fixed

Fixed assets are measured at their initial cost; their value

assets, meaning their reported value can increase or decrease

FIXED ASSETS can decrease via depreciation or impairments, but it

as their fair value changes. In addition, IRS requires separate

cannot increase

depreciation processes for separable components of PP&E

INTANGIBLES Fair value allowed Historical cost

IRS 15, effective 2018 - Converged standard focusing on a ASC 606, effective 2018 - US GAAP allows an entity to make a

conceptual framework using a 5-step process for recognizing policy election to account for shipping and

revenue. Minor differences in implementation and updates. handling activities that occur after the customer has obtained

REVENUES Revenue for similar licenses under IRS 15 may be recognized control of a good as an activity to fulfill the promise to transfer

at a point in time if the reporting entity undertakes no activities the good rather than as an additional promised service;

that significantly affect the ability of the customer to obtain revenue for all licenses to symbolic intellectual property is

benefit from the intellectual property recognised over time under US GAAP

SIMILARITIES IN RECENT CHANGES

IRS 16 effective 2019. ASC 842 effective 2019.

Leases over 12 months recognized as Right of Use Assets on Leases over 12 months recognized as Right of Use Assets on

LEASES

Balance Sheet with corresponding Lease Liabilities. Balance Sheet with corresponding Lease Liabilities.

No Finance/Operating Lease categories. Distinguishes between Operating and Finance Leases.

No change. ASU 2015-03

DEBT ISSUANCE

Debt issuance costs are netted Debt issuance costs are now netted

COSTS against the outstanding debt against the outstanding debt

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WWOORRKKIINNGG CCAAPPIITTAALL

BRIAN FEROLDI

Working Capital measures the difference between a

company’s Current Assets and Current Liabilities.

Working Capital (

Draft

1. Strategy & Decision-Making

Long-term capital planning aligned with corporate goals:

Developing a structured investment roadmap for engineering projects, ensuring alignment with company-wide strategic priorities, such as sustainability, digital transformation, and operational efficiency.

Engineering project portfolio optimization using strategic frameworks:

Applying BCG Matrix, McKinsey 7S, and Porter’s Five Forces to assess the viability, priority, and resource allocation of multiple engineering projects.

2. Finance & Accounting

Cost-benefit analysis for CAPEX projects:

Evaluating the financial return on capital expenditures (CAPEX) by analyzing project costs, expected ROI, payback period, and potential operational cost savings.

ROI and financial risk assessments for major investments:

Using Net Present Value (NPV), Internal Rate of Return (IRR), and Weighted Average Cost of Capital (WACC) to justify capital investments and assess financial risks before committing resources.

Draft

3. Mergers & Acquisitions (M&A)

Evaluating synergy effects in supplier contracts:

Assessing how supplier integration can reduce procurement costs, enhance reliability, and create economies of scale, similar to how large M&A deals seek synergy benefits.

Due diligence mindset in project collaborations:

Applying an M&A-style risk assessment when engaging in large-scale collaborations, ensuring cultural, financial, and operational fit before committing to a new partner or technology.

4. Leadership & Stakeholder Management

Engaging cross-functional teams for project execution:

Leading discussions with finance, operations, and senior management to align engineering projects with broader business objectives, ensuring smooth execution and adoption.

Navigating power-interest dynamics with internal & external stakeholders:

Applying stakeholder mapping and influence strategies to manage different priorities and secure buy-in from leadership, suppliers, and regulatory bodies.

Why This Matters for My Role

✅ Demonstrates strategic thinking and financial acumen in engineering leadership.

✅ Aligns engineering decisions with corporate growth, risk management, and sustainability.

✅ Strengthens cross-functional collaboration and stakeholder engagement.

A Manager’s

Guide to Finance

& Accounting

Contents

As a manager, every decision you make has financial implications. An intuitive

understanding of finance and accounting can take you from simply performing your job

3 Finance vs. Accounting: duties to understanding the greater impact your actions have on your organization’s

financial health. It can benefit you no matter your industry, whether it’s:

What’s the Difference?


Engineering: Engineering is a project-based field, in which attention to

6 Financial Skills All Managers detail is highly valued. Understanding the costs and benefits of each

component of a project can make you a more effective manager.

Should Have

Financial Statement Analysis .............7 
Marketing: Whether you’re projecting future traffic flow to your company’s

website or tracking the number of new customers driven by your latest

Financial Fluency .............................21

blog post, you’re using financial skills and concepts to excel as a marketer.

ROI Calculation ...............................23


Sales: As a sales manager, knowing how to read a financial statement and

Budgeting ........................................26

use financial terminology can help you understand the rationale behind

Financial Performance your company’s goals.

Measurement ..................................28


Human Resources: If you’re an HR manager, a familiarity with finance and

31 Taking the Next Step in Your accounting can enable you to facilitate meaningful cross-departmental

conversations and advocate for your budget to hire or train employees.

Financial Education


Healthcare: A foundational knowledge of financial principles and

concepts can inform decisions to purchase emerging technologies or

fund new research that equips your organization to better support its

patients.

These are just a handful of ways financial literacy can pay off in your profession.

Throughout this guide, you’ll expand your knowledge of finance and accounting

by learning about the differences between the two disciplines, the financial skills

all managers need, and how taking an online course can help you achieve your

educational goals and accelerate your career.

Finance vs. Accounting:

What’s the Difference?

Finance and accounting are terms often used interchangeably. While both are related

to the administration and management of an organization’s assets, each has a different

scope and focus. When it comes to evaluating the financial health of your company or

department and making strategic financial decisions, it’s important to have a working

knowledge of both disciplines.

Here’s a look at the key differences between finance and accounting.

1. The Scope and Focus The accounting equation must always balance—the assets

on the left should equal the claims against those assets on

the other side. It’s a fundamental means for determining

Finance and accounting operate on different levels of the

whether a company’s financia

Free cash flow is arguably the most important one, which

examines how much money a company has to distribute to

ASSETS = LIABILITIES + OWNERS’ EQUITY

investors, or reinvest, after all expenses have been covered.

It’s a strong indicator of profitability and can be used to make

present-day investment decisions based on an expectation of

The equation consists of three components:

future payoff.

• Assets: Anything a company owns with quantifiable value

• Liabilities: Money a company owes to a debtor, such as

outstanding payroll expenses, debt payments, rent and

utilities, bonds payable, and taxes

• Owners’ equity: The net worth of a company, or the

amount that would be left if all assets were sold and all

liabilities paid; this money belongs to shareholders, who

may be private owners or public investors

Finance vs. Accounting: What’s the Difference? 4

2. How You Measure Financial 3. How You Assess Value

Performance

Another difference between the disciplines is their approach

to value. In accounting, a conservatism principle is often

This difference in scope underscores a contrast between the

applied, which suggests that companies should record

underlying principles of accounting and finance.

lower projected values of their assets and higher estimates

The accrual method of accounting, followed by most of their liabilities. Under this doctrine, if you don’t know the

organizations, records transactions as they’re agreed value of something precisely, you count it as zero. Doing

upon, as opposed to when they’re completed. It allows for so helps businesses avoid overextending themselves by

transactions to be made with credit or deferred payments underestimating the value of assets and overestimating the

and operates under the idea that revenues and costs will liabilities they owe.

smooth out over time to more accurately depict economic

This is handled much differently in finance, which employs

reality. This makes it possible to compare year-over-year

an analytical process, known as valuation, to determine

growth of a company’s revenues, costs, and profits without

the worth of a company, project, or asset. The gold

factoring in one-off events or seasonal and cyclical changes.

standard is discounting, which is applied to a series of cash

Finance rejects that idea, believing that the best way flows over a period of time. The discount rate, represented as

to measure economic returns is to calculate the cash a a percentage, accounts for opportunity cost, inflation, and

company can produce and leverage, which depends on when risk, and brings the value of a future stream of cash to its

that cash is exchanged—rather than just agreed upon. present value.

Both finance and accounting are useful for assessing a company’s position and performance. By understanding the

underlying principles of each discipline and how they contrast, you can develop greater financial intuition and make

better business decisions.

Next, you’ll le

accountants and finance specialists are trained to read and understand these documents, many business professionals are not.

The effect is an obfuscation of critical information.

To understand a company’s financial position, you need to review and analyze several financial statements: balance sheets,

income statements, cash flow statements, and annual reports.

The Balance Sheet When a balance sheet is reviewed internally, it’s designed to

give insight into whether a company is succeeding or failing.

Based on this information, policies and approaches can be

A balance sheet is a financial document designed to

shifted: doubling down on successes, correcting failures, and

communicate exactly how much a company or organization is

pivoting toward new opportunities.

worth—its “book value.” It achieves this by listing and tallying

all of a company’s assets, liabilities, and owners’ equity as of a When a balance sheet is reviewed externally, it’s designed

particular reporting date. to give insight into the resources available to a business and

how they were financed. Based on this information, potential

Typically, a balance sheet is prepared and distributed on a

investors can decide whether it would be wise to invest.

quarterly or monthly basis, depending on the frequency of

External auditors might also use a balance sheet to ensure a

reporting as determined by law or company policy.

company is complying with any reporting laws it’s subject to.

The Purpose of a Balance Sheet It’s important to remember that a balance sheet communicates

information as of a specific date. By its very nature, a balance

Balance sheets serve two very different purposes, depending

sheet is always based on past data. While investors and

on the audience reviewing them.

stakeholders may use a balance sheet to predict future

performance, past performance is no guarantee of future

results.

Financial Skills All Managers Should Have 7

The Contents of a Balance Sheet

The information in a balance sheet is most often organized Assets

according to the accounting equation: Assets = Liabilities +

An asset is anything owned by a company that holds

Owners’ Equity.

inherent, quantifiable value. A business could, if necessary,

While this equation is the most common formula for balance convert an asset into cash through a process known as

sheets, it isn’t the only way of organizing the information. liquidation. Assets are typically tallied as positives (+) in a

Here are other equations you may encounter: balance sheet and broken down into two further categories:

current assets and non-current assets.

OWNERS’ EQUITY = ASSETS - LIABILITIES Current assets typically include anything a company expects

it will convert into cash within a year, such as:

LIABILITIES = ASSETS - OWNERS’ EQUITY

• Cash and cash equivalents • Marketable securities

A balance sheet should always balance. Assets must always • Prepaid expenses • Accounts receivable

equal liabilities plu

• Brands

Here’s a more detailed breakdown of the items that fall under

Because companies invest in assets to fulfill their mission,

the components of a balance sheet: assets, liabilities, and

you must develop an intuitive understanding of what they are.

owners’ equity.

Without this knowledge, it can be challenging to understand

the balance sheet and other financial documents that speak

to a company’s health.

Financial Skills All Managers Should Have 8

Liabilities Owners’ Equity

A liability is the opposite of an asset. While an asset is Owners’ equity, also known as shareholders’ equity,

something a company owns, a liability is something it owes. typically refers to anything that belongs to the owners of a

Liabilities are financial and legal obligations to pay an amount business after liabilities are accounted for.

of money to a debtor, which is why they’re typically tallied as

If you were to add up all the resources a business owns (the

negatives (-) in a balance sheet.

assets) and subtract all of the claims from third parties (the

Just as assets are categorized as current or non-current, liabilities), the residual left over is the owners’ equity.

liabilities are classified the same way.

Owners’ equity typically includes two elements. The first is

Current liabilities typically refer to any liability due to the money, which is contributed to the business in the form of

debtor within one year, which may include: an investment in exchange for some degree of ownership—

typically represented by shares. The second is earnings that

• Payroll expenses • Debt financing

the company generates over time and retains.

• Rent payments • Accounts payable

• Utility payments • Other accrued expenses

Non-current liabilities typically refer to any long-term

obligations or debts that will not be due within one year,

which might include:

• Provisions for pensions

• Leases

• Deferred tax liabilities

• Loans

• Bonds payable

Liabilities may also include an obligation to provide goods or

services in the future.

Financial Skills All Managers Should Have 9

Company A

As of June 30, 2019 and June 30, 2020 (In US$ thousands)

Assets

BUSINESS INSIGHT

NON-CURRENT ASSETS JUNE 30, 2020 JUNE 30, 2019

BRANDS $ 255 $ 302

A Balance Sheet Example

CUSTOMER RELATIONS 71 84

LEASEHOLD RIGHTS 537 585

By looking at this balance sheet, you can CAPITALIZED EXPENDITURES 631 -

extract vital information about the health GOODWILL 64 64

of the company being reported on. BUILDINGS AND LAND 805 804

EQUIPMENT, TOOLS, FIXTURES AND FITTINGS 18,326 16,589

LONG-TERM RECEIVABLES 628 608

This balance sheet tells you:

DEFERRED TAX RECEIVABLES 1,624 1,234

TOTAL NON-CURRENT ASSETS 22,941 20,270

1 The reporting period ends on June

30, 2020, and compares against

CURRENT ASSETS JUNE 30, 2020 JUNE 30, 2019

a similar reporting period from the INVENTORY 15,213 13,819

prior year. ACCOUNTS RECEIVABLE 2,207 2,337

TAX RECEIVABLE 477 -

2 The company’s assets to

slightly more than the same period a ACCOUNTS PAYABLE 4,234 4,307

year prior. TAX LIABILITIES - 1,851

OTHER LIABILITIES 2,765 2,428

ACCRUED EXPENSES AND OTHER DEFERRED REVENUE 7,011 6,171

TOTAL LIABILITIES $ 16,338 $ 16,084

SHAREHOLDERS’ EQUITY JUNE 30, 2020 JUNE 30, 2019

SHARE CAPITAL $207 $207

RESERVES (1,900) (487)

RETAINED EARNINGS 45,528 44,384

Financial Skills All Managers Should Have TOTAL SHAREHOLDERS’ EQUITY 43,835 10 44,104

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 60,173 $ 60,188

The Income Statement Accountants, investors, and business owners regularly review

income statements to understand how well a business is

doing in relation to its expected performance and use that

An income statement, also known as a profit and loss (P&L)

knowledge to adjust their actions. A business owner whose

statement, summarizes the cumulative impact of revenue,

company misses targets might, for example, pivot strategy

gain, expense, and loss transactions for a given period. The

to improve in the next quarter. Similarly, an investor might

document is often shared as part of quarterly and annual

decide to sell an investment to buy into a company that’s

reports, and shows financial trends, business activities

meeting or exceeding its goals.

(revenue and expenses), and comparisons over set periods.

The Contents of an Income Statement

The Purpose of an Income Statement

While all financial data helps paint a picture of a company’s

An income statement tells the financial story of a business’s

financial health, an income statement is one of the most

activities. Within an income statement, you’ll find all revenue

important documents a company’s management team and

and expense accounts for a set period. Accountants create

individual investors can review because it includes a detailed

income statements using trial balances from any two points

breakdown of income and expenses over the course of a

in time.

reporting period. This includes:

From an income statement and other financial documents,

• Revenue: The amount of money a business takes in

you can determine:

during a reporting period

• Whether the business is generating a profit

• Expenses: The amount of money a business spends

• If it’s spending more than it earns during a reporting period

• When costs are highest and lowest • Costs of goods sold (COGS): The cost of

component parts of what it takes to make whatever it is a

• How much it’s paying to produce its product

business sells

• If it has the cash to invest back into the business

• Gross profit: Total revenue less COGS

• Operating income: Gross profit less operating expenses

• Income before taxes: Operating income less non-

operating expenses

Financial Skills All Managers Should Have 11

• Net income: Income before taxes less taxes In short, it’s the process of reading down a single column of

data in a financial statement and determining how individual

• Earnings per share (EPS): Division of net inc

net profit, interest, taxes, depreciation, and amortization

improving.

together

Vertical analysis isn’t always as immediately useful as

These categories may be further divided into individual line

horizontal analysis, but it can help you determine what

items, depending on a company’s policy and the granularity

questions should be asked, such as: Where did costs rise or

of its income statement. For example, revenue is often split

fall? What line items are contributing most to profit margins?

out by product line or company division, while expenses may

How are they affected over time?

be broken down into procurement costs, wages, rent, and

interest paid on debt.

Income Statement Analysis

There are two methods commonly used to read and analyze

an organization’s financial documents: vertical analysis and

horizontal analysis.

Vertical Analysis

Vertical analysis refers to the method of financial analysis

where each line item is listed as a percentage of a base

figure within the statement. This means line items on income

statements are stated in percentages of gross sales instead of

in exact amounts of money, such as dollars.

Financial Skills All Managers Should Have 12

Horizontal Analysis

Whereas vertical analysis focuses on each

line item as a percentage of a base figure BUSINESS INSIGHT:

within a current period, horizontal analysis

Accounting Standards: GAAP vs. IFRS

compares changes in the dollar amounts

in a company’s financial statements over Accounting standards are critical to ensuring a

multiple reporting periods. It’s frequently company’s financial information and statements are

used in absolute comparisons but can be accurate and comparable to data reported by other

used as percentages, too. organizations.

Horizontal analysis makes financial data The two main sets of accounting standards followed

and reporting consistent per generally by businesses are GAAP and IFRS.

accepted accounting principles (GAAP).

• GAAP, also referred to as US GAAP, is an

It improves the review of a company’s

acronym for Generally Accepted Accounting

consistency over time, as well as its growth

Principles. This set of guidelines is set by the

compared to competitors.

Financial Accounting Standards Board (FASB)

Because of this, horizontal analysis is and adhered to by most US companies.

important to investors and analysts. By

• IFRS stands for International Financial

conducting a horizontal analysis, you can

Reporting Standards. These principles are

tell what’s been driving an organization’s

dictated by the International Accounting

financial performance over the years and Standards Board (IASB) and followed in many

spot trends and growth patterns, line item countries outside the US.

by line item. Ultimately, horizontal analysis

Deciding which set of standards to use depends

is used to identify trends over time—

on whether your company operates in the US or

comparisons from Q1 to Q2, for example—

internationally

ended on September 28, 2019. NET SALES $ 4,358,100

COST OF SALES 2,738,714

GROSS PROFIT 1,619,386

This income statement tells you:

OPERATING INCOME AND EXPENSES AMOUNT

1 The company brought in a total of $4.36 billion

SELLING AND OPERATING EXPENSES $ 560,430

through sales, and it cost approximately $2.74 billion

GENERAL AND ADMINISTRATIVE EXPENSES 293,729

to achieve those sales, for a gross profit of $1.62 billion.

TOTAL OPERATING EXPENSES 854,159

2 A total of $560.43 million in selling and operating OPERATING INCOME 765,227

expenses and $293.73 million in general and

OTHER INCOME AND EXPENSES AMOUNT

administrative expenses, were subtracted from that

OTHER INCOME $ 960

profit, leaving an operating income of $765.23 million.

GAIN (LOSS) ON FINANCIAL INSTRUMENTS 5,513

3 Additional gains were added to the operating income (LOSS) GAIN ON FOREIGN CURRENCY (12,649)

and losses were subtracted, including $257.64 million INTEREST EXPENSE (18,177)

in income tax. INCOME BEFORE TAXES 740,874

4 By the end of the year, the company saw a net income OTHER INCOME AND EXPENSES AMOUNT

of $483.23 million. INCOME TAX EXPENSE 257,642

NET INCOME $ 483,232

Financial Skills All Managers Should Have 14

The Cash Flow Statement

BUSINESS INSIGHT:

A cash flow statement provides a detailed picture of what

happened to a business’s cash during a specified duration Cash Flow vs. Profit

of time, known as an accounting period. It demonstrates an

The key difference between cash flow

organization’s ability to operate in the short and long term,

and profit is that, while profit indicates

based on how much cash is flowing into and out of it.

the amount of money left over after all

expenses have been paid, cash flow

The Purpose of a Cash Flow Statement

indicates the net flow of cash into and

out of a business.

By reading a cash flow statement, you can see how much

cash different types of activities generate, then make

Profit and cash flow are important in

business decisions based on that analysis.

their own ways. As a manager, you need

to understand both metrics and how

It’s important to note that cash flow is different from profit,

they interact if you want to evaluate the

which is why a cash flow statement is often interpreted with

financial health of a business.

other financial documents.

For example, it’s possible for a company

to be profitable and have a negative

cash flow hindering its ability to pay its

expenses, expand, and grow. Similarly,

a company with positive cash flow and

increasing sales can fail to make a profit,

as is the case with many startups and

scaling businesses.

Financial Skills All Managers Should Have 15

The Contents of a Cash Flow Statement Direct Method

Cash flow statements are broken into three sections: cash The first method used to calculate the operation section is

flow from operating activities, cash flow from investing called the direct method, which is based on the transactional

activities, 

real estate or vehicles, and non-physical property, like

patents accounting method in which the accountant records

revenues and expenses at times other than when cash was

• Financing activities detail cash flow from both debt and

paid or received—meaning that these accrual entries and

equity financing

adjustments cause the cash flow from operating activities to

Ideally, cash from operating income should routinely exceed differ from net income.

net income. A positive cash flow speaks to a company’s

Instead of organizing transactional data, like the direct

financial stability and ability to grow its operations.

method, the accountant starts with the net income number

found in the income statement and makes adjustments to

How Cash Flow Is Calculated

undo the impact of the accruals made during the period.

Now that you understand what comprises a cash flow

Essentially, the accountant will convert net income to actual

statement and why it’s important for financial analysis, here

cash flow by de-accruing it through a process of identifying

are two common methods used to calculate and prepare the

any non-cash expenses for the period from the income

operating activities section of cash flow statements.

statement. The most common and consistent of these are

depreciation, the reduction in the value of an asset over time,

and amortization, the spreading of payments over multiple

periods.

Financial Skills All Managers Should Have 16

How to Interpret a Cash Flow Statement Types of Cash Flow

Cash flow statements can reveal what phase a business is Cash flow is typically depicted as being positive or negative.

in: whether it’s a rapidly growing startup or a mature and Here’s what those designations mean.

profitable company. It can also reveal whether a company is

Positive Cash Flow

going through transition or in a state of decline.

Positive cash flow indicates that a company has more money

As a manager, you might look at a cash flow statement to

flowing into the business than out of it over a specified period.

understand how your particular department is contributing

This is an ideal situation because having an excess of cash

to your company’s health and wellbeing, and use that insight

allows the company to reinvest in itself and its shareholders,

to adjust your team’s activities. Cash flow might also impact

settle debt payments, and find new ways to grow the business.

internal decisions, such as budgeting or whether to hire (or

fire) employees. Positive cash flow does not necessarily translate to profit.

Your business can be profitable without being cash flow-

positive, and you can have positive cash flow without actually

making a profit.

Negative Cash Flow

Having negative cash flow means your cash outflow is

higher than your cash inflow during a period, but it doesn’t

necessarily mean profit is lost. Negative cash flow may

instead be caused by expenditure and income mismatch,

which should be addressed as soon

ADJUSTMENTS TO RECONCILE NET INCOME TO CASH GENERATED BY

March 30, 2020. OPERATING ACTIVITIES:

DEPRECIATION AND AMORTIZATION 6,757

DEFERRED INCOME TAX EXPENSE 1,141

This cash flow statement tells you:

OTHER 2,253

1 The company started the year with CHANGES IN OPERATING ASSETS AND LIABILITIES:

ACCOUNTS RECEIVABLE, NET (2,172)

approximately $10.75 billion in

INVENTORIES (973)

cash and equivalents.

VENTOR NON-TRADE RECEIVABLES 223

OTHER CURRENT AND NON-CURRENT ASSETS 1,080

2 It brought in $53.66 billion through ACCOUNTS PAYABLE 2,340

its regular operating activities. DEFERRED REVENUE 1,459

OTHER CURRENT AND NON-CURRENT LIABILITIES 4,521

3 It spent approximately $33.77 CASH GENERATED BY OPERATING ACTIVITIES 53,666

billion in investment activities.

INVESTING ACTIVITIES: AMOUNT

4 In addition to investment activities, PURCHASES OF MARKETABLE SECURITIES (148,489)

it spent a further $16.38 billion in PROCEEDS FROM MATURITIES OF MARKETABLE SECURITIES 20,317

financing activities, making for a PROCEEDS FROM SALES OF MARKETABLE SECURITIES 104,130

PAYMENTS MADE IN CONNECTION WITH BUSINESS ACQUISITIONS, (496)

total cash outflow of $50.15 billion.

NET OF CASH ACQUIRED

PAYMENTS MADE FOR ACQUISITION OF PROPERTY, PLANT, AND (8,195)

5 The company ended the year with a EQUIPMENT

positive cash flow of $3.51 billion, PAYMENTS FOR ACQUISITION OF INTANGIBLE ASSETS (911)

and total cash of $14.26 billion. OTHER (160)

CASH USED IN INVESTING ACTIVITIES (33,774)

FINANCING ACTIVITIES: AMOUNT

DIVIDENDS AND DIVIDEND EQUIVALENT RIGHTS PAID (10,564)

REPURCHASE OF COMMON STOCK (22,860)

PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT, NET 16,896

OTHER 149

CASH USED IN FINANCING ACTIVITIES (16,379)

CASH AND CASH EQUIVALENTS BALANCE AT THE END OF THE YEAR AMOUNT

Financial Skills All Managers Should Have 18

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 3,513

CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,259

The Annual Report The Contents of an Annual Report

An annual report is a publication that public corporations An annual report is often split into two halves. The first section

are required to publish every year by law. It describes a typically includes a narrative of the company’s performance

company’s operations and financial conditions so that over the previous year, along with forward-looking statements.

current and potential shareholders can make informed The second section strips the story out and includes financial

investment decisions. documents and statements. Here’s a more detailed list of the

items an annual report contains:

Unlike other financial data, annual reports include editorial

and storytelling, and they’re typically professionally designed • Letters to shareholders: These letters typically include

and used as marketing collateral. Annual reports are sent one from the CEO or president and other key figures, such

to a company’s shareholders before its annual shareholder as the CFO.

meeting and the election of its board o

or discussions pertinent to the financial statements listed

• If and how it’s grown over time above.

• What it requires to maintain or expand its business • Auditor’s report: This report describes whether the

company has complied with GAAP in preparing its

• Operational expenses compared to generated revenues

financial statements.

All of these insights can help you be privy to conversations

• Accounting policies: This is an overview of the policies the

surrounding your company’s future.

company’s leadership team adhered to when preparing

the annual report and financial statements.

Financial Skills All Managers Should Have 19

BUSINESS INSIGHT:

Annual Report vs. 10-K Report

Annual reports aren’t the only documents public companies are required to publish yearly. The US Securities

and Exchange Commission (SEC) requires public firms to produce a 10-K report, which informs investors of a

business’s financial status before they buy or sell shares.

While there’s similar data in both reports, they are separate.

10-K reports are organized per SEC guidelines and include full descriptions of a company’s fiscal activity, corporate

agreements, risks, opportunities, current operations, executive compensation, and market activity. You can also

find detailed discussions of operations for the year and a full analysis of the industry and marketplace.

Because of this, 10-K reports are longer and denser than annual reports and have strict requirements—they must

be filed with the SEC between 60 to 90 days after the end of a company’s fiscal year.

If you need to review a 10-K report, you can find it on the SEC website.

Reviewing and understanding these financial documents can provide you with valuable insights about your

organization, such as:

• Its debts and ability to repay them

• Profits and losses for a given quarter or year

• Whether profit has increased or decreased compared to similar past accounting periods

• The level of investment required to maintain or grow the business

• Operational expenses, especially compared to the revenue generated from those expenses

The value of these documents lies in the story they tell when reviewed together.

Financial Skills All Managers Should Have 20

SKILL 2: FINANCIAL FLUENCY

If you’re in a non-finance role, the thought of talking data, 2. Capital Gain: A capital gain is an increase in the value of

forecasts, and valuations may seem daunting. Having that an asset or investment above the price you initially paid for it.

financial fluency, however, can help you clearly communicate If you sell an asset for less than its original purchase price, it

the monetary implications of decisions to stakeholders and would be considered a capital loss.

make a greater impact on your company.

3. Compound Interest: This refers to “interest on interest.”

Here are eight terms and definitions you should know. When you’re investing or saving, compound interest is

earned on the amount you deposited, plus an

receive periodic interest payments and get back the

and expenses. You can use forecasting to predict a project’s

loaned amount at the time of the bond’s maturity—or

future cash flows, then discount those cash flows to

the defined term at which the bond can be redeemed.

determine its present value.

• Stocks: A stock is a share of ownership in a public or

private company. When you buy stock, you become a 5. Liquidity: Liquidity describes how quickly your assets can

shareholder and can receive dividends—the company’s be converted into cash. Because of that, cash is the most

profits—if and when they’re distributed. liquid asset. The least liquid assets are items like real estate

or land, which can take weeks or months to sell.

• Cash and Cash Equivalents: This refers to any asset that’s

in the form of cash or can easily be converted into cash

Financial Skills All Managers Should Have 21

6. Net Worth: Net worth indicates the overall state of your financial health. You can

calculate net worth by subtracting what you own (your assets) from what you owe

(your liabilities).

7. Time Value of Money: The time value of money is the concept that a unit of

currency received today is worth more than the same unit of currency received at a

future point. The further into the future, the less the unit of currency is worth. This is

because of three factors: the opportunity cost of not having currency to invest, the

impact of inflation, and the risk of not receiving the unit of currency in the future. “Gaining a core competency

in financial analysis is really

8. Valuation: Valuation is the process of determining the current worth of an

important in helping me create an

asset, company, or liability. Regularly repeating the process can help ensure you’re environment where the correct and

prepared if faced with an opportunity to merge or sell your company, and when best decisions get made as we work

seeking funding from outside investors. cross-functionally with Finance and

Development.”

Lisa Arpey

Leading with Finance

Participant

By mastering these basic finance terms, you can gain a more holistic view

of your business, understand the value of your work, and improve how you

communicate financial goals and performance.

Financial Skills All Managers Should Have 22

SKILL 3: ROI CALCULATION Positive vs. Negative ROI

When a project yields a positive return on investment, it

Return on investment (ROI) is a metric used to denote how can be considered profitable because it produced more in

much profit has been generated from an investment that’s revenue than it cost to pursue. If it yields a negative return on

been made. investment, it means the project cost more to pursue than it

generated in revenue. If the project breaks even, it means the

Knowing how to calculate ROI can benefit you in several ways,

total revenue matched the project’s expenses.

including helping you make the case for a project, providing

greater insight into you

makes sense to pursue. Anticipated ROI uses estimated

costs, revenues, and other assumptions to determine how ROI = (NET PROFIT / COST OF INVESTMENT) X 100

much profit a project is likely to generate.

This figure will often be run through several different scenarios

In project management, the formula is written similarly but

to determine the range of possible outcomes. These numbers

with slightly different terms:

are then used to understand risk and, ultimately, decide

whether an initiative should move forward.

ROI = [(FINANCIAL VALUE - PROJECT COST) / PROJECT COST] X 100

Actual ROI is the true return on investment generated from a

project. This number is typically calculated after a project has

concluded and uses final costs and revenues to determine how

much profit was made compared to what was estimated.

Financial Skills All Managers Should Have 23

Calculating the ROI of a Project: An Example

TEST YOUR KNOWLEDGE

Imagine you have the opportunity to purchase 1,000 chocolate bars for $2 apiece.

You would then sell the chocolate to a grocery store for $3 per piece. In addition to Question

purchasing the chocolate, you need to pay $100 in transportation costs.

Refer to the chocolate bar

To decide whether this would be profitable, you would tally your total expenses and example in this section. What

your total expected revenues. would the anticipated ROI

be if you had the opportunity

EXPECTED REVENUES = 1,000 X $3 = $3,000

to buy 1,500 chocolate bars

for $3 apiece and decided

TOTAL EXPENSES = (1,000 X $2) + $100 = $2,100

to sell them for $5 each? Be

sure to factor in the $100 in

You would then subtract the expenses from your expected revenue to determine the

transportation costs.

net profit.

Once you’ve done your

NET PROFIT = $3,000 - $2,100 = $900

calculations, proceed to the

next page for the answer.

To calculate the expected return on investment, you would divide the net profit by

the cost of the investment, and multiply that number by 100.

ROI = ($900 / $2,100) X 100 = 42.9%

By running this calculation, you can see the project will yield a nearly 43 percent

positive return on investment, so long as factors remain as predicted. Therefore, it’s

a sound financial decision. If the endeavor yielded a negative ROI, or an ROI that

was so low it didn’t justify the amount of work involved, you would know to avoid it.

Financial Skills All Managers Should Have 24

It’s important to note that this example calculates an anticipated ROI for your

project. If any of the factors affecting expenses or revenue were to change during TEST YOUR KNOWLEDGE

implementation, your actual ROI could be different.

Answer

For example, imagine that you’ve already purchased your chocolate bars for the

The anticipated ROI would

agreed-upon $2 apiece and paid $100 to transport them. If the most that the store

be 63 percent. Here’s a

will pay you is $2.25 per chocolate bar, then your actual revenues drop substantially

breakdown o

unforeseen circumstances, but the same general principles hold true.

By learning how to calculate ROI for projects you’re interested in pursuing, you can self-evaluate them before they’re

shared with other decision-makers within your organization and ensure you’re making the best possible use of available

resources. Similarly, by understanding how to calculate ROI after a project is done, you can speak to the contributions

that you and your team have made toward shared company goals.

Financial Skills All Managers Should Have 25

SKILL 4: BUDGETING 2. Leverage Financial Data

In addition to connecting with stakeholders, leverage

existing financial data in your decision-making process. By

One of the most important finance skills for managers to

analyzing financial statements, you can gain insight into your

master is budgeting, or the process of preparing and overseeing

organization’s financial health and determine how to suitably

a financial plan that estimates income and expenses over a

apportion resources.

defined period.

“Business conditions change rapidly, and basing your current

At its most basic level, a budget ensures a team or department

budget on historical information can adversely impact budgets

has the resources needed to achieve its goals. For managers,

within other areas of an organization,” writes John Wong, HBS

the budget serves as a vital tool for:

Online’s senior associate director of Financial Planning and

• Communicating expectations and goals to stakeholders

Analysis, in an article for the Business Insights blog.

• Mobilizing teams and departments around organizational

3. Work Toward Goals

objectives

Understanding your organization’s goals is vital to successful

• Assessing group and individual performance

budgeting. This knowledge can help you develop a clear

• Gaining insight into an organization’s financial health picture of how your team’s work fits into the company’s key

objectives and advances its overarching mission.

• Allocating resources strategically and appropriately

For example, your firm may be planning an important

If you want to reap the benefits of these techniques, here are

organizational change initiative, such as a redesign of its

five budgeting tips you can employ to become a better manager.

website. As part of this process, your team will be responsible

1. Know Your Organization’s Budgeting Timeline and for writing web copy, creating videos, and designing graphics.

Procedures

With these requirements in mind, you can break your team’s

Familiarize yourself with your organization’s budgeting work down into specific deliverables and line items within

deadlines and procedures at the outset of the process. Your your budget, accounting for all the resources your employees

numbers may be reliant on financial targets set by your will need to produce the desired results and push the project

supervisor and other department heads. Knowing when through to completion.

specific 

The deliverables in your budget can serve as key milestones that inform how you

Even though I’m not in a finance role,

manage your employees’ time and deliver feedback. If a particular task is at risk of not

operating in a general management

being completed or incurring additional costs, be prepared to modify line item amounts

position, I need to make decisions

and delivery dates.

utilizing the principles we learned

Maintain this kind of flexibility throughout the budget management process and daily. The course empowered me to

do that.”

be ready to reallocate resources, when needed, to ensure your organization is well-

positioned to achieve its goals.

Paul Accornero

5. Communicate Progress and Results Leading with Finance

Participant

Clear and consistent communication is crucial when overseeing a budget. Establish

a regular cadence for meeting with key stakeholders to report your employees’

contributions and results. Use data visualization techniques to illustrate your team’s

progress, and make it a point to highlight any accomplishments or shortcomings that

could have implications that extend beyond your direct reports.

Carve out time to update your employees as well. Keeping them apprised of the impact

of their work can help them feel more engaged and motivated.

Budgeting is an essential management skill that can drive organizational success. With a clear understanding of

your firm’s processes and goals, a well-developed plan for evaluating performance, and a knowledge of financial

principles, you can make more informed decisions and ensure your team meets its targets.

Financial Skills All Managers Should Have 27

SKILL 5: FINANCIAL

PERFORMANCE

MEASUREMENT

Financial key performance indicators (KPIs) are metrics 2. Net Profit Margin

used to track, measure, and analyze the financial health of

Net profit margin is a profitability ratio that measures the

a company. They fall under a variety of categories, including

percentage of revenue and other income left after subtracting all

profitability, liquidity, solvency, efficiency, and valuation.

costs for the business, including costs of goods sold, operating

By learning financial KPIs, you can understand how your expenses, interest, and taxes. Net profit margin differs from

organization is performing financially. You can then use this gross profit margin as a measure of profitability for the business

knowledge to adjust your department or team’s goals and in general, taking into account not only the cost of goods sold

contribute to strategic objectives. but all other related expenses.

Here are 12 financial KPIs managers should understand.

NET PROFIT MARGIN = NET PROFIT / REVENUE * 100

1. Gross Profit Margin

3. Working Capital

Gross profit margin is a profitability ratio that measures

the percentage of revenue left after subtracting the cost of

Working capital is a measure of the business’s available

goods sold. The cost of goods sold refers to the direct c

whether the business can pay its short-term obligations— to the use of debt to buy assets. If all the assets are financed by

that is, obligations due within one year—with its current equity, the multiplier is one. As debt increases, the multiplier

assets and liabilities. increases from one, demonstrating the leverage impact of the

debt and, ultimately, increasing the business risk.

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

LEVERAGE = TOTAL ASSETS / TOTAL EQUITY

5. Quick Ratio

7. Debt-to-Equity Ratio

The quick ratio, also known as an acid test ratio, is another

The debt-to-equity ratio is a solvency ratio that measures how

type of liquidity ratio that measures a business’s ability to

much a company finances itself using equity versus debt.

handle short-term obligations. The quick ratio uses only

This ratio provides insight into the solvency of the business by

highly liquid current assets in its numerator, such as cash,

reflecting the ability of shareholder equity to cover all debt in

marketable securities, and accounts receivables. The

the event of a business downturn.

assumption is that certain current assets, like inventory, are

not necessarily easy to turn into cash.

DEBT-TO-EQUITY RATIO = TOTAL DEBT / TOTAL EQUITY

QUICK RATIO =

(CURRENT ASSETS - INVENTORY) / CURRENT LIABILITIES

8. Inventory Turnover

Inventory turnover is an efficiency ratio that measures how

many times per accounting period the company sold its

entire inventory. It gives insight into whether a company has

excessive inventory relative to its sales levels.

INVENTORY TURNOVER = COST OF GOODS SOLD / (BEGINNING

INVENTORY + ENDING INVENTORY / 2)

Financial Skills All Managers Should Have 29

9. Total Asset Turnover 12. Seasonality

Total asset turnover is a ratio that measures how efficiently a Seasonality is a measure of how the period of the year is

company uses its assets to generate revenue. The higher the affecting your company’s financial numbers and outcomes.

turnover ratio, the better the company’s performance. If you’re in an industry affected by high and low seasons, this

measure will help you sort out confounding variables and see

the numbers for what they truly are.

TOTAL ASSET TURNOVER = REVENUE /

(BEGINNING TOTAL ASSETS + ENDING TOTAL ASSETS / 2) It’s important to note there’s no absolute good or bad when

it comes to financial KPIs. Metrics need to be compared

to prior years or industry competitors to see whether your

10. Return on Equity

company’s financial performance is improving or declining,

Return on equity, more commonly displayed as ROE, is and how it’s performing relative to others.

a profitability ratio measured by dividing net profit over

shareholders’ equity. It indicates how well the business can

utilize equity investments to earn profit for investors.

ROE = NET PROFIT / (BEGINNING EQUITY + ENDING EQUITY) / 2

Now that you know the financial skills you need to

succeed as a manager, the question become

If you want to develop or further your financial skills, you might be interested in Harvard Business School Online’s Financial Accounting

and Leading with Finance courses. Curious about which certificate program is the right fit for you? Here’s a closer look at what the

courses offer.

Course Information Financial Accounting Leading with Finance

Faculty V.G. Narayanan Mihir Desai

Course Length 8 Weeks 6 Weeks

What You’ll Learn • How to prepare a balance sheet, income statement, • A toolkit for making smart financial decisions and the

and cash flow statement confidence to communicate those decisions to key

stakeholders

• Processes for reading and analyzing financial

statements to determine your company’s business • Financial analysis techniques and how capital markets work

performance and potential

• Ways to create and assess value to evaluate and pitch

• Forecasting and valuation methods projects

Who Will Benefit • Current or aspiring managers who want to understand • Early- and mid-career professionals who want to understand

how their decisions impact their company’s bottom the financial landscape of their business and industry to

line and improve its profitability advance their career—particularly if they’re in a non-finance

role

• Recent graduates interested in learning the language

of business • Aspiring finance professionals who want to learn fundamental

financial terms, concepts, and principles

• Those considering an MBA who want to prepare for

the classroom with a course HBS offers to incoming • New leaders who want to equip themselves with the skills to

students create a budget, calculate ROI, and articulate the financial

implications of their decisions

How to Learn More Visit the Financial Accounting course page Visit the Leading with Finance course page

Both courses can equip you with skills that will prove invaluable in your role as a manager and throughout your career. You can also learn

more in Desai’s book, How Finance Works: The HBR Guide to Thinking Smart About the Numbers.

Developing financial literacy will enable you to make better business decisions, understand the financial implications of your actions,

and more effectively communicate and collaborate with others throughout your organization.

To learn more about what HBS Online

can do for you, visit online.hbs.edu.