Financial Intelligence, Revised Edition: a Managers Guide to Knowing What the Numbers Really Mean
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Q:
If yous read the news regularly, y'all have learned a practiced deal in recent years virtually all the wonderful means people detect to cook their companies' books. They record phantom sales. They hide expenses. They sequester some of their properties and debts in a mysterious identify known equally off balance sheet.
Some of the t
Q:
If you read the news regularly, you have learned a adept bargain in recent years nigh all the wonderful ways people discover to cook their companies' books. They tape phantom sales. They hide expenses. They sequester some of their properties and debts in a mysterious place known equally off balance sheet.
Some of the techniques are pleasantly simple, like the software company a few years back that boosted revenues by shipping its customers empty cartons just before the stop of a quarter. (The customers sent the cartons back, of course—but non until the following quarter.) Other techniques are complex to the point of almost-incomprehensibility. (Remember Enron? It took years for accountants and prosecutors to sort out all of that ill-fated visitor's spurious transactions.) Equally long as there are liars and thieves on this world, some of them will no dubiousness observe means to commit fraud and embezzlement. (c)
Highly recommend.
This book past Karen Berman and Joe Knight is an excellent primer for any not-accountant managers who want to understand what the numbers actually mean. Information technology is very easy to understand and full of insightful stories (and sometimes jokes) tha
Dorsum when I was in college I learned nigh the beauty of finance and accounting. Information technology was a very interesting subject that I almost decided to switch class and exist an auditor. Nevertheless, upward to this day, I still detect bookkeeping not merely exciting merely very useful.This book past Karen Berman and Joe Knight is an splendid primer for whatever non-accountant managers who desire to empathise what the numbers actually mean. It is very easy to understand and full of insightful stories (and sometimes jokes) that will make the reading feel worthwhile.
I have to confess that I tried to read this book several months before but stop myself because I thought this volition need that I bring out my calculator. Well I was incorrect. The volume has total of piece of cake to understand examples and computations that will make us learn how a business works from financial standpoint.
I urge everyone who is running a business to read this. The insights here are very useful so one would sympathize why a business organization is taking a particular form of action (peculiarly those that seemed ridiculous and shaded with office politics). This book volition not make you an accountant. This volume is carefully written with the non-financial person in listen. Whether you are an manager, a front-line employee, or simply someone who wants to learn about business organization, y'all will surely get something that you tin can utilize right abroad from this book.
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I am somewhat biased to most books from Harvard Business Publishing (due in part to a contributing author/member of the Harvard Business Review advisory council) mainly because their fabric is very in depth and not always that easy to bound into.
This book is probably the best overall reading material in understanding Managerial Accounting and to exist able to understand what people in your finance departments at work, exist it your CFO or co-workers to even ameliorate understanding your CPA at tax time.I am somewhat biased to most books from Harvard Business Publishing (due in role to a contributing writer/fellow member of the Harvard Business Review advisory council) mainly considering their material is very in depth and not always that easy to spring into. This book is the exception to beingness able to jump in and empathise apace where Ms. Berman is going with her descriptions and definitions.
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Volition read once again soon. Sumary:
There is 3 statements that are basic and helpful when it comes to analyzing any concern: income statement, balance canvass and greenbacks period statement.
I. Income argument: reports business fiscal state after a flow (a month, a quarter, a year) three things => revenue, expense and profit. Some notes:
- Revenue is the the value(price) of the product/service that sells to customers. It should exist noted whenever a
Will read again soon. Sumary:
There is 3 statements that are basic and helpful when it comes to analyzing whatsoever concern: income statement, balance canvas and greenbacks flow statement.
I. Income statement: reports business organisation financial state later a period (a month, a quarter, a year) 3 things => revenue, expense and profit. Some notes:
- Acquirement is the the value(cost) of the product/service that sells to customers. It should be noted whenever a customer makes a purchase. For retail, normally the customer pays immediately when a purchase happens, just when it comes to a large sale or some kind of special custom made production, it takes much more time to go the money from the client (like 30 -60 days).
- COGS (cost of good sold) or COS (cost of service) is the expense that get straight involved in the process of making the product/service. It 'south also called variable expense (the more products are made, the bigger the price is).
=> Gross turn a profit = Revenue - COGS. It tells how good the concern is in making coin from selling the product/service.
- Capital expenditure: (initial investment when start up business) not listed in this statement, usually used for PPE, intellectual backdrop (IP), ... and shows up as Depreciation/Acquittal.
- Operating expense: (as well called stock-still expense, mostly unchanged in a period of fourth dimension)
1. The indirect expense that keeps your concern smoothly operate everyday: electric bills, water bills, cablevision bills, internet bills, telephone bills, rental cost, employee wages...
2. Depreciation/Amortization: value deduction periodically from fixed asset (long-term asset).
Depreciation is for tangible assets PPE: (Property, Plants & Equipments), transportation, ...
Amortization is for intangible assets: patents, intellectual backdrop, technologies, ...
=> Question is how long should the depreciation/acquittal last?
- Other expenses: SG&A expenses (Sale, General and Admin).
=> Operating turn a profit = Gross turn a profit - Operating expense. It tells how good the management and administration is in operating the business.
=> Also called EBIT (Earnings before interest(for debt)/loss and taxation)
- Involvement/Loss is deductible from revenue enhancement. Information technology 's used as a financial leverage as a tax shield.
- Net profit = EBIT - interest - taxation. The final effigy, what remains!!
=> Matching principle: expense and revenue should match together in a same period.
II. Balance sheet: shows everything that the business organization owns! at i point (often after a financial year)
=> Balance equation: (Total) Nugget = Liability(Debt) + Equity(Capital)
- Current assets (short-term assets): assets that tin be converted in cash within a twelvemonth like cash and equivalence, A/R (business relationship receivables: money that customers nonetheless owe) and inventory(may include raw material, work-in-process production, finished product).
- Fixed assets (long-term assets): like PPE (tangible), goodwill, IP (intangible)
- Other assets: prepaid asset.
- Electric current liability: brusk-term debt (debt needs to pay back inside a year), A/P (account payables: money that concern owes to providers) .
- Long-term liability (debt): why long-term? => boost upwards a business that may be oftentimes unable to bring any profit in the get-go year.
=> Working upper-case letter = Current assets - Current liability. It shows how much greenbacks/idle money that the business organization has in short-term.
=> If this figure is depression, peradventure the business volition have problem paying for their expenses, or fifty-fifty can't pay debt.
III. Greenbacks menses argument:
- For investment activities: inquiry, business expanding, ownership backdrop, ...
=> Volition the business organisation be scaled up? Market expanding? New products?
- For business activities: money from customers, expenses, ...
=> Is the business thriving?
- For financial activities: borrowing and paying back coin, capital funding, paying dividends, ...
=> How dependent the business concern is on exterior resources?
=> Cash is not Profit!!
=> Cash shows concern health in a vivid motion-picture show!!
IV. How can these statement be assessed, are they good or bad?
=> Apply some important ratios:
1. Gross profit / Revenue ratio
2. Operating profit/ Acquirement ratio
iii. Internet profit/ Revenue ratio
=> the bigger the amend
4. Return on Asset: ROA = Net turn a profit / Total nugget. For example, ROA = 5% means for every 100 USD invested in business, it returns 5 USD as profit. (The conversion ratio from asset to profit).
=> the bigger the better.
5. Return on Disinterestedness: ROE = Net profit / Disinterestedness => the bigger the better.
=> Debt-2-Equity = Debt / Equity. Commonly noticed by the banks, to see if a business has too much debt or not and whether it should get a loan. => the smaller the ameliorate.
6. Involvement coverage ratio = EBIT / almanac involvement. Usually noticed by the banks, to see the capability of paying debt of a business organisation. => the bigger the better.
7. Current ratio = current asset / short term liability. Information technology has similar meaning as working capital.
Also quick ratio = (current nugget - inventory) / short term liability. It tells how quick a business tin pay their debt without even selling the inventory. => the bigger the better
viii. Days in inventory (DII) = boilerplate inventory / COGS (per twenty-four hour period). It tells averagely, how long a production stays in inventory => the smaller the meliorate.
Also Inventory turn = 360 (days) / DII => aforementioned pregnant => the bigger the better.
9. Days sale oustanding: DSO = A/R (at the finish of period) / COGS (per day). It tells how quick a business can collect its money from customers. => the smaller the better.
Similarly, Days payable oustanding (DPO). => how quick a business concern pay back money to providers.
V. Now what?
- Nosotros invest!!! When starting a business or to invest in a new project, should consider some factors:
one. Cost of capital = cost of debt + cost of equity: (weighted) average profit ratio
For example, we outset a business, nosotros demand capital => borrow from banks 25USD with 4% interest, and we go invested 75 USD from investors with the promise of getting 16% turn a profit.
And then, CoC = 25%x4% + 75%16% = xiii% => the maximum turn a profit we will go.
=> Question is, what ratio is acceptable? how we tin can manage that?
2. Return on Investment: ROI, several ways to calculate this.
=> It tells how long a business organisation will eventually render the investment money.
=> Question is, how long is acceptable and worths investing? Google Net Present Value (NPV)!
iii. Always consider all opportunity costs and the fourth dimension value aspect of money: nowadays value, futurity value.
- Apply those understandings/analysis to make the business ameliorate
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The authors took a topic most avert--corporate finance--and fabricated it easy to sympathise. They avoided jargon, provided real-earth examples, and kept the numbers, decimals, and complicated ratios to a minimum. For me, this led to many 'a-ha!' moments in which the book demystified the seemingly cabalistic procedures of our CFO and his gang of eggheads. At our next financial review, I look forward to actively listening instead of checking twitter and hoping for a swift decision.
But let'south be existent this shit is mad boring. You gotta really Desire it, like I did, to get through this 1. Moreover, if you're like me, you'll come away disgusted with how unregulated corporate accounting is. Of course the marketplace crashes every 15 years, the enforceable standards are hieroglyphics! Companies can brand their numbers say just nearly anything using shady accounting practices that in many cases are perfectly legal and barely frowned upon.
Anyway, this book fit a particular need for me and I'g glad to have read information technology.
4/5, infringe from your MBA dropout friend.
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20 years agone I started my Undergrad degree in Finance...I quickly learned I hated debits and credits and swiched to Operations. Since then I have worked my fashion up in Corporate America. I am constantly bombarded by diverse fiscal jargon. Some of which I accept picked up, but much of it still could exist every bit foreign as learning Latin.
Financial Intelligence cuts through the jargon to provide you a articulate definitition of what the various statements, reports and ratios hateful and more
WOW! That sums it up.20 years ago I started my Undergrad degree in Finance...I quickly learned I hated debits and credits and swiched to Operations. Since and then I have worked my way up in Corporate America. I am constantly bombarded by various financial jargon. Some of which I have picked up, but much of information technology still could exist every bit strange equally learning Latin.
Fiscal Intelligence cuts through the jargon to provide you lot a clear definitition of what the various statements, reports and ratios mean and more importantly...how can yous bear on them to better yourself and your organization.
I listened to this via audiobook and found it very piece of cake to follow. However I practise plan on purchasing a hardcopy for hereafter reference. The toolboxes the author'southward talk over should be handy for firsthand reference.
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The professor at schoolhouse recommends this for students with no or little feel in Finance --the way the authors intended information technology to be.
The book explains that most corporates are measured past numbers (well duh) and that is why managers who are working their fashion up demand to understand how their decisions affect these numbers. The authors are trainers themselves and I detect their explanations comprehensible eg. how delaying buyin
I'm slowly getting myself into studying over again --where did summer break go?!The professor at school recommends this for students with no or fiddling experience in Finance --the way the authors intended it to exist.
The book explains that most corporates are measured by numbers (well duh) and that is why managers who are working their fashion up need to understand how their decisions affect these numbers. The authors are trainers themselves and I discover their explanations comprehensible eg. how delaying buying inventory tin benefit cash menstruation, why an upgrade in system tin be irrelevant, how net profit is not equivalent to cash, and so on.
It besides provides interesting examples of companies most readers are familiar with such as Apple, Boeing, Hewlett-Packard although when explaining some technicalities, the authors use simple business concern model eg. cupcake shop with equity of $25. I detect this especially useful (and probably some finance folks will, as well when explaining these terms/concepts to non-finance colleagues/friends).
"With all these terms for the same affair, i might go the thought that our friends in finance and accounting don't want united states to know what is going on. Or maybe they just have it for granted that everybody knows that all the different terms mean the same matter."
Perhaps considering I am an accountant myself that I do use this cognition in my personal life likewise. I am rather conservative in managing my financial (budgeting, re-forecasting, reconciling, etc) and clearly non the #yolo kind. (I think this is obvious haha). And since the end of last year, I accept received many questions from friends/acquaintances who are quite eager in joining the hype of cryptocurrency. And from now on, I will enquire them to follow this investment strategy from Warren Buffet that I found in the volume. It is quite simple just says a lot:
"Beginning, he evaluates a business on its long-term rather than its short-term prospects. Second, he always looks for businesses he understands. (This led him to avoid many Net-related investments.) And third, when he examines fiscal statements, he places the greatest accent on a measure of cash period that he calls possessor earnings."
And lastly, if yous are hesitant to larn about finance because you think information technology requires sophisticated math, worry not:
"Information technology might surprise you to know that, for the well-nigh part, finance involves improver and subtraction. When finance people become really fancy, they multiply and dissever. We never have to accept the second derivative of a office or determine the expanse under a curve (lamentable, engineers). And then have no fearfulness: the math is easy. And calculators are cheap."
If y'all want to acquire how to read income statements, residuum sheets, cashflow statements, sympathize what each piece mean and especially why they exist or used the way they're used, and especially, clarify the infinite and confusing finance vocabulary, this is it.
Easily earned 5 stars from me. I never, ever, thought I would find a book about finance that explained all the why's, what's and how's in such a unproblematic and easy way. Additionally to that, the book is engaging. An engaging finance book?!If y'all want to learn how to read income statements, balance sheets, cashflow statements, empathize what each piece hateful and peculiarly why they exist or used the way they're used, and especially, analyze the infinite and confusing finance vocabulary, this is information technology.
This book beats whatever form I've e'er taken. You lot can also come not knowing anything as it never assumes you "should" know something.
I'll recommend this volume to decease.
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Deus Vult
--Gottfried
- Whether you're running your own business or working for an system, it's important to have financial intelligence.
- Finance and Bookkeeping is more art than science. An accountant must make lots of judgments and decisions such every bit when to recognize a revenue, and how to categorize an expense, and so on. Sometimes companies group lots of losses on i quarter to make the next quarters look better. Sometimes companies recognize acquirement that shouldn't
- Whether you're running your own business or working for an organization, information technology'south important to have fiscal intelligence.
- Finance and Accounting is more art than scientific discipline. An accountant must make lots of judgments and decisions such equally when to recognize a revenue, and how to categorize an expense, and so on. Sometimes companies group lots of losses on one quarter to make the side by side quarters look ameliorate. Sometimes companies recognize revenue that shouldn't be recognized yet. At the cease, they can't put something that is not there, but they can skew the numbers and their categorization to make the company look better than it actually is. This is done sometimes to avoid share toll from dropping, but not for long.
- A revenue should be recognized at the time of delivering the product/service not at fourth dimension of signing the contract and not at time of receiving the payment from the client. If the service is spread over fourth dimension (for example back up service for 12 months), and then the acquirement should as well be spread on these months.
- The Income Statement shows acquirement, expenses, and profit for a period of time. It'south also called a profit and loss argument (P&L). The bottom line of income statement is net profit, also known as net income.
- Operating Expenses are the costs required to keep the business going from day to day. They include salaries, benefits, and insurance costs, among a host of other items. Operating expenses are listed on the income statement and are subtracted from revenue to determine profit.
- Capital Expenditures (CAPEX, الإنفاق الرأسمالي) is the purchase of an detail that's considered a long term investment, such as computer systems and equipment and machines and buildings. Operating expenses show up on the income statement, and thus reduce turn a profit. Still, capital expenditure show up on the residual canvas; merely the depreciation of a slice of capital equipment appears on the income argument.
- An accrual is the portion of a acquirement or expense detail that is recorded in a particular time span. Production development costs, for instant, are likely to be spread over several accounting periods, and and so a portion of the total toll will be accrued each month. The purpose of accruals is to match costs to revenues in a given time period every bit accurately as possible.
- Allocations are apportionment of costs to dissimilar departments or activities within a company. For instant, overhead costs such as the CEO's salary and 60 minutes department and Finance department are oft allocated to the company'due south operating unit of measurement.
- Allow'south say that you have worked on developing a product on June and it was launched in July. The accountant needs to decide how to accrue your salary and where to allocate information technology. He needs to brand an assumption regarding if yous have helped with producing the first batch of products. If much of your salary was put under development cost and non under production price, it would reflect to the CEO concerns on the risks related to developing a new product and also it will reverberate product costs cheaper than the actual cost which could atomic number 82 to the product being priced less than the cost. And vice versa. Indeed, accountants must make artful assumptions and decisions.
- If product costs go upwardly, gross profit goes down. Gross profit is a is a key mensurate for assessing product profitability. Evolution costs, even so, go into R&D, which is included in the operating expense department of the income statement and doesn't bear upon gross profit at all.
- Depreciation is the method accountants utilise to allocate the cost if equipment and other avails to the full cost of products and services as shown on the income statement. It is based on the aforementioned thought as accruals: nosotros want to match as closely as possible the costs of our products and services with what was sold. Most uppercase investments other than land are depreciated. Accountants effort to spread the toll if the expenditure over the useful life of the item.
- Goodwill comes into play when one company acquires some other company. It is the difference between the internet avails acquired (that is, the fair market value of the assets less the assumed liabilities) and the amount of money the acquiring company pays for them. For case, if a visitor's net assets are valued at $1 million and the acquirer pays $3 one thousand thousand, then goodwill of $2 1000000 goes onto the acquirer's residuum sheet. That $2 one thousand thousand reflects all the value that is not reflected in the acquiree'due south tangible avails. For example, its name, reputation, and and then on.
- The balance sail reflects the avails, liabilities, and owners' equity at a bespeak in time. In other words, it shows, on a specific day, what the company endemic, what information technology owed, and how much it was worth. The remainder sheet is called such because it balances. Assets always must equal liabilities plus owners' equity. A financially savvy manager knows that all the income statements ultimately period to the balance sheet.
- Profit is based on revenue, and revenue is recognized when a product or service is delivered, not when the neb is paid. So the profit is oftentimes no more than than a promise. Customers have non paid however, so the revenue number does not reverberate real coin. If everything goes well, the company will eventually collect its receivables and will have cash corresponding to that profit. In the meantime, it doesn't. Sometimes a highly profitable company can exist tight on cash and can't aggrandize on expenses.
- The income statement measures the sales and expenses, it doesn't reverberate the cash flow. The income statement is an guess and it'due south not 100% accurate.
- If an ink-and-toner supplier buys a truckload of cartridges in June to resell to customers over the side by side several months, information technology does not record the price of all those cartridges in June. Rather, information technology records the price of each cartridges when the cartridge is sold. The reason is the matching principle which is a fundamental accounting rule for preparing an income statement. It only states: "Friction match the cost with its associated revenue to determine profits in a given period of fourth dimension". In other words, one of the accountants' primary jobs is to figure out and properly record all the costs incurred in generating sales.
- The income argument tries to measure whether the products and services that a visitor provides are profitable when everything is added up. It's the accountants' best effort to show the sales the company generated during a given time menstruum, the costs incurred in making those sales (including the costs of operating the business for that span of fourth dimension), and the profit, if any, that is left over. A sales manager needs to know what kinds of profits he and his team are generating and so that he can brand decisions about discounts, terms, which customers to pursue, and so on. A marketing manager needs to know which products are about profitable so that those can be emphasized in any marketing campaigns.
- Over time, the income statement and the cash flow argument in a well-run company volition rails 1 another. Profit volition exist turned into cash. However, only because a company is making a profit in whatever given time period doesn't mean information technology will accept the greenbacks to pay its bills. Profit is e'er and estimate. And yous tin't spend estimates.
- It happened many times before that a company ships products to their partners at the end of the quarter only to marking these shipments equally sales. This is known every bit "channel stuffing". What happens is that the partners ship back the shipments that they didn't even enquire for.
- Gross profit is revenue minus cost of appurtenances and services, it reflects the profitability of your products. Operating turn a profit is gross turn a profit minus the operating cost, it reflects the profitability of the operation of your business over all. Net profit is operating profit minus taxes and interests. Net profit is what is left over later on everything is subtracted.
- Contribution margin is sales minus variable costs. It tells y'all how assisting a production is and it tells you how much of your product you demand to sell in society to comprehend the fixed cost. Information technology also helps with the pricing of the product. This surface area is also related to Production Management.
- No matter what's your company manner of recording acquirement and costs, what matters is the consistency from year to year.
- The above has focused on the income statement. As for the residue sheet, it is a statement of what a concern owns and what it owes at a particular bespeak in time. The difference between what a company owns and what it owes represents equity.
- Equity is the shareholders' "pale" in the company every bit measured by bookkeeping rules. It's too called the company's volume value. In accounting terms, equity is always assets minus liabilities; it is likewise the sum of all capital pain in my shareholders plus any profits earned by the visitor since its inception minus dividends paid out to the shareholders.
- Over fourth dimension, the disinterestedness section of the rest canvas shows the accumulation of profits or losses left in the business.
- The rule of the residuum sheet goes as follows: assets = liabilities + owners' equity
- Assets consist of cash and stocks (liquid assets) and equipments and lands and goodwill. A lot of art goes into estimating the electric current value of not-liquid assets.
- Accounts Receivable is the amount customers owe the visitor. Acquirement is a promise to pay, so accounts receivable includes all the promises that oasis't yet been collected. Why is this an asset? Because all or most of these commitments will convert to cash and presently will belong to the company. It's similar a loan from the visitor to its customers.
- Sometimes a remainder sheet includes an detail labeled "allowance for bad debt" that is subtracted from accounts receivable. This is the accountants' estimate -usually based on past experience- of the dollars owed by customers who didn't pay their bills. In many companies, subtracting a bad-debt allowance provides a more accurate reflection of the value of those accounts receivable.
- Country doesn't wear out, so accountants don't record whatever depreciation each year. But buildings and equipment practice. The point of bookkeeping deprecation, however, isn't to judge what the buildings and equipment are worth right now; the point is to classify the investment in the nugget over the time it is used to generate revenue and profit (the matching principle). The depreciation charge is a way of ensuring that the income statement accurately reflects the truthful cost of producing goods or delivering services.
- If a visitor buys another company for $5 meg. If yous pay cash, the asset chosen greenbacks in your remainder sheet will decrease past $v meg. That means other assets have to rise by $5 1000000. If the bought company physical assets are worth $two million, that doesn't mean that you made a bad bargain. A brand proper name like Coke Cola is worth much more than that its concrete avails. The difference of $3 1000000 is to be marked every bit goodwill.
- If yous paid for rent of $lx,000 for 12 months in accelerate and recording it as $v,000 each month equally per the matching principle, where did the other $55,000 cash become in the balance sheet? It gets marked as prepaid asset (yous own the place for the upcoming 11 months) and decreases each month by $5,000 and gets reflected in the income statement as $5000 cost of operational toll.
- Should you marker a marketing entrada toll of $ane million every bit one time cost or do y'all divide it into the upcoming 24 months claiming that the impact of the campaign would extend over that catamenia? It'south an art more than than a science.
- Deferred revenue gets marked as part of liability. It represents money received for products or services that have not still been delivered. Once the product or service has been delivered, the corresponding revenue will be included in the income statement and it will come off the balance canvas. Industries where you might see deferred acquirement on the residual sheet includes airlines (y'all pay before you fly) and project- based businesses.
- Retained earnings are the profits that have been reinvested in the business instead of beingness paid out in dividends. Investors don't similar it when a visitor retain earnings as cash that is not being invested anywhere and they pressure the company to at to the lowest degree get in into dividends.
- What the rest canvass is balancing? On 1 side are the assets, which is what the company owns. On the other side are the liabilities and disinterestedness, which show how the company obtained what it owns. You tin also look at information technology this way: the assets consist of two parts, one which needs to be used to pay for the liabilities and one is majuscule and profits for the owners. The rest sheet lists nicely all the company avails in one side, and in the other side it lists the owners of these assets.
- If you open a visitor and put $l,000 in cash. Then in assets side there volition be $fifty,000 as cash, and in owners' disinterestedness side there will also be amount of $fifty,000. Let'south say you lot took a loan of $10,000, now the assets side includes $60,000, so from where this came from? Nosotros only add $10,000 in liabilities side. Recollect, transactions affect both sides of the rest sheet.
- Profits in the income statement gets reflected in the balance sail as disinterestedness. On the avails side, it gets reflected as either cash or accounts receivable.
- When a visitor buys a piece of capital equipment, the cost doesn't evidence up on the income statement; rather, the new asset appears on the balance sheet, and only the depreciation appears on the income statement as a charge against profit.
- Many profitable companies close down in their first year. The reason is that they would run out of cash. The more than sales y'all're generating the more than expenses you're paying for the materials, all while not even so turning the accounts receivable into cash.
- If a visitor is profitable but short on cash, then it needs financial expertise, someone capable of lining up additional financing. If a company has cash but is unprofitable, information technology needs operational expertise, meaning someone capable of bringing downwards costs or generating boosted revenue without adding costs.
- At that place is much less room for manipulation of the numbers on the greenbacks flow statement than on income argument and balance sheet. Less room doesn't hateful "no room". For example, if a company is trying to show good cash flow in a detail quarter, it may delay paying vendors or employee bonuses until the next quarter. Unless a company delays payments over and over -somewhen vendors who don't go paid will stop providing goods and services- the effects are pregnant merely in the short term.
- Y'all can calculate a cash menstruation statement just past looking at the income argument and two residual sheets.
- Reconciliation, in a fiscal context, means getting the greenbacks line on a company's balance sheet to match the actual cash the visitor has in the bank.
- Operating lease is widely used in the airline industry and others. Rather than buying equipment such as an airplane outright, a visitor lease it from an investor. The lease payments count as an expense on the income argument, but there is no asset and no debt related to that asset on a company'south books. Some companies that are already over-leveraged are willing to pay a premium to charter equipment just to keep the ratios of interest coverage (operating profit / almanac interest charges) and debt-to-equity ratio (total liabilities / shareholders' equity) in the expanse that bankers and investors like to see.
- To know how good your company is at collecting their money, divide average account receivable by the revenue then divide by 365 (the number of days in a twelvemonth).
- To know how tight your company is with using inventory (the tighter the better), carve up average inventory by COGS per day. Walmart'southward ratio is 47. This ways that inventory gets sold on average after a month and a one-half. That's a skilful boilerplate in super market place industry. For Target, it is 74 meaning that information technology takes 2 months and a half for them to sell an detail as soon every bit it gets into the inventory.
- Numbers that are important to investors:
- 1. Acquirement growth from i year to another
- 2. Earnings per share (EPS)
- 3. Earning before involvement, taxes, depreciation, and amortization (EBITDA) - a strong good for you visitor should feel growth un EBITDA over fourth dimension. As well information technology is oft used in valuing businesses. Many companies are bought and sold at a toll that u.s. an agreed-upon multiple of EBITDA.
- 4. Gratuitous cash period - separate cash flow by EBITDA, if the ratio is low information technology may betoken that the company is trying to brand its EBITDA stronger than it is.
- five. Return on full capital, or render on equity
- 6. Market place cap (the number of shares multiplied by the share value)
- vii. Share price to earning - usually it's between sixteen and 18. Companies with higher ratios are considered to have high growth potential.
- Companies with high market cap and high share toll to earnings are healthy and their jobs are more secure, and at that place is more opportunity to grow in the company. And the visitor is more likely to get loans when needed and is more than likely to survive tough economies.
- These in a higher place ii numbers depend on market perceptions, which in turn are driven by: the company's current financial operation + the company'due south prospects for growth in the hereafter + the company's anticipated greenbacks flows in the future + the predictability of its performance, that is, the degree of risk involved + investors' assessments of the expertise of a company's direction and the skills of its employees
- As well there are other factors, such as the overall country if the economy, the condition of the stock market in full general, the level of speculative fervor, etc.
- At whatever given point in time, investors volition disagree about a visitor's "true" value, which is why some are willing to buy shares at a item price and some are willing to sell them.
- Investors sympathise that investment is a game of psychology equally well as of economics. As the economist John Maynard Keynes in one case pointed out, buying stocks is like trying to anticipate who will win a beauty contest. You want to choose not the person who you think is the most beautiful but the person you lot think everyone else will see as nigh beautiful. [note: this is the reverse of what Warren Buffett is suggesting which is to invest in companies that are underrated and that you lot wouldn't heed investing in them for very long time]
- Astute management of the balance sheet is similar fiscal magic. Information technology allows a company to ameliorate its financial performance even without boosting sales or lowering costs. Meliorate balance sheet management makes a business more efficient at converting inputs to outputs and ultimately to cash. Companies that tin can generate more cash in less time have greater freedom of action; they aren't and then dependent on outside investors or lenders.
- Working Capital is the coin a company needs to finance its daily operations. Accountants normally measure information technology by calculation up a visitor's cash, inventory, and accounts receivable, and so subtracting short-term debts. The longer a company'south DSO (days outstanding receivables), the more than working capital is required to run the business. If your daily sales are $1 one thousand thousand, then you lot'll get additional $1 meg in cash for each twenty-four hour period you lot cutting from the DSO.
- Companies who pay their vendors as early every bit possible go greater back up from these vendors. Vendors are unremarkably small scale and they demand the greenbacks flow to office comfortably. Be their champion, and they volition work hard for you.
- Educating the staff on finance and bookkeeping, increasing their fiscal intelligence, is of import. It always increases staff dedication and efficiency. When they empathize the "why" backside management decisions, they will commit to it, instead of seeing management like bunch of guys who don't know what they're doing. Educate with the existent numbers. Even individual companies can do that by scaling downwardly the numbers just keeping the patterns.
1. a splendid Refresher Course for any finance professional
2. an incisive handbook for any non-finance person who is interested to understand financial statements/ operations of a business organisation from a financial perspective
Notation - This book has been published before "Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers" which is by the aforementioned authors.
Hence, delight do non read the latter since the content is virtually the s
one. a splendid Refresher Grade for any finance professional
two. an incisive handbook for whatsoever non-finance person who is interested to understand fiscal statements/ operations of a business from a financial perspective
Notation - This book has been published earlier "Financial Intelligence for Entrepreneurs: What Yous Actually Need to Know About the Numbers" which is by the same authors.
Hence, please do not read the latter since the content is most the same as this book .
Standout features:
1. Authors brand the content interesting by highlighting many cases of fiscal shenanigans committed by various companies. Past reading this, non-finance people will appreciate the machinations. And finance people volition be able to chronicle to the rationale backside introducing various Bookkeeping Standards on revenue recognition, leases etc.
2. Detailed breakup of financial statements, ratios and operations.
Useful insights from the book:
1. Bookkeeping and finance are not reality, they are a reflection of reality, and the accuracy of that reflection depends on the power of accountants and finance professionals to make reasonable
assumptions and to calculate reasonable estimates.
two. Finance is an art as much as it is a scientific discipline; the financial statements are prepared using assumptions, estimates and biases.
three. In a familiar phrase generally attributed to Peter Drucker, profit is the sovereign criterion of the
enterprise. The use of the give-and-take sovereign is right on the coin.
4. Income argument - Creating income statements for smaller business organization units has provided
managers in big corporations with enormous insights into their fiscal performance.
Full general Motors had adult this bounded organization. (this fact has been mentioned in the book Relevance Lost)
5. Accrual v/s Pro forma income statement - Pro forma is a projection whilst accrual is based on actual numbers
vi. You can think of operating expenses as the cholesterol in a business. Adept cholesterol makes you good for you, while bad cholesterol clogs your arteries. Adept operating expenses make your business strong, and bad operating expenses elevate down your bottom line and forestall you from taking advantage of business organization opportunities. (Some other name for bad operating expenses is "unnecessary bureaucracy."
7. Relationship between Residue Sheet and Income Argument:
What is this relationship? Consider an illustration. Profitability is sort of similar the grade you lot receive for a course in college. You lot spend a semester writing papers and taking exams. At the finish of the semester, the instructor tallies your functioning and gives yous an A- or a C+ or whatever. Equity is more than similar your overall form point boilerplate (GPA). Your GPA always reflects your cumulative performance, merely at simply 1 point in time. Whatever ane class affects it, but doesn't determine it. The income statement affects the residue sheet much the way an individual grade affects your GPA. Make a profit in any given flow, and the equity on your balance sheet will show an increment. Lose
coin, and information technology volition show a decrease. Over time, the equity department of the residue sheet shows the accumulation of profits or losses left in the business; the line is called retained earnings (losses) or sometimes accumulated earnings (deficit).
eight. Cash is not equal to profit. The ultimate lesson hither is that companies need both turn a profit and cash. They are dissimilar, and a healthy business requires both.
nine. There are four categories of ratios that managers and other stakeholders in a business typically utilise to analyze the company'due south performance: profitability, leverage, liquidity, and efficiency.
Each type of ratio provides a unlike view - like looking into a house through windows on all 4 sides.
10. In that location are many more than golden nuggets!!
I exercise hope y'all notice this review useful. Please permit me know your reviews after reading the book. Cheers!
...more
MBA 6130
Just to give you a hint about the value of the book, I remember from college days, that we were taught different methods of depreciation and renewing the book value of all PPEs at the terminate of each yr. But I never un If yous look for a deep understanding of finance and accounting, this book is a must-read. Actually, I 've been looking for such a book for some time, but all I got was some full-of-number books. To exist honest, although I am a big fan of finance, I never felt similar a deep agreement!
Just to give you a hint most the value of the book, I remember from college days, that nosotros were taught dissimilar methods of depreciation and renewing the volume value of all PPEs at the end of each twelvemonth. But I never understood the deep rationality backside information technology. I never understood why P&L statements don't business relationship for majuscule expenditures. Aren't we supposed to subtract each period'south expenses from its revenue to get the bottom line? well, information technology turned out I never comprehend what the Matching Principle is all well-nigh :)
If you are but familiar with the nearly basics of accounting, you could sympathise all of the concepts of this book. Then, yous don't need to exist a savvy financial expert to be able to read this book. ...more than
The volume goes through 3 key components of Financial statement are Income statement, Remainder Sheet and Cash Period statement at non-financial perspective. It did a thou
This book provides fundamental knowledge about finances similar a textbook only in the narrative manner of a non-fictional book. It helps the reader catch the idea with down-to-world explanations, notwithstanding, it is quite difficult to structure cognition by constantly repeating the definition of the terms. You improve jot downwardly & shape it yourself.The book goes through three key components of Financial statement are Income statement, Balance Sheet and Cash Flow statement at non-financial perspective. It did a great chore by blowing my heed, finance & bookkeeping are not just only about numbers and facts but it is an art contains rational assumptions & estimates.
"Art of finance is the art of using limited data to come every bit close as possible to an accurate clarification of how well a company is performing"
The volume supposedly imparts the 4 skillsets of financial literacy:
ane. Understanding the Basics of fiscal management
2. Learning the Art of presenting and interpreting numbers.
3. Knowing how to Analyze the numbers in depth.
4
The volume supposedly imparts the 4 skillsets of financial literacy:
ane. Agreement the BASICS of financial management
2. Learning the Fine art of presenting and interpreting numbers.
3. Knowing how to Clarify the numbers in depth.
four. Seeing the financial results in the CONTEXT of a bigger picture.
Information technology starts by talking about how you shouldn't trust the numbers considering they're past nature total of assumptions, estimates and biases (and this is repeated to death in the book).
Then it moves on to dive into the 3 main types of fiscal statements: income argument, balance sheet, and cashflow statements. They define the key components constitute in the statements, what are some things to look out for, and what'due south commonly done to present the numbers more positively.
Finally, the book covers things like: (i) doing analyses with ratios (which is followed past formula after formula with some clarification each), (ii) improving working uppercase and (iii) building a financially intelligent visitor.
I was actually undecided between a 3* and a four*. But I settled on a 4* because:
1. It's really quite rare to find a book that explains business finance without going into all the nitty-gritty accounting details
2. To be fair, they did do a decent chore on a rather complex topic: there was a mix of technical knowledge + applied tips and examples
3. If you have zero financial and accounting noesis, it'south probably a good "finance 101" guide. Fifty-fifty if you do have some groundwork similar me (I take a business degree and did a few modules on management accounting and financial accounting), information technology's a good refresher with a focus on the more applied things to await out for.
BUT it'due south not a book I'll return to, and I can't say I'thou a fan because:
1. The book is supposedly written for laymen, but the language is still quite stuffy and technical.
2. At times I practice feel like I'm reading a business organization textbook, because they try to define every other term, to the bespeak it becomes hard to read.
3. There'south quite a lot of repetition, mostly revolving around the message that the numbers are total of assumptions and estimates (yeah, I kinda got that after the first 10 repetitions....no need for the 100th 1).
Overall, a pretty useful book if y'all want to showtime getting a grip on those numbers.
Book summary at: https://readingraphics.com/book-summa...
...more I similar one of the anecdotes in the story - the CEO walks into the room and asks the accountants - has it been cooked to 350F? Or something similar
The short story of this volume is that the world is entirely capitalistic at this point, whether you like it or non. That basically means that companies will always try to boost profits, at the expense of many things. Given how the financial system is ambiguous by nature, information technology can be very easy for companies to cook their books to make themselves look ameliorate.I like 1 of the anecdotes in the story - the CEO walks into the room and asks the accountants - has it been cooked to 350F? Or something similar that. The idea is that every unmarried visitor can melt the books, and they will practice it to improve how things look. Simple things like moving effectually the purchase date and when the money comes in. And then there are likewise more complex things similar discounting the assets that they have and amortization. Like how Boeing of a sudden had a lot of profits one quarter because the accountants realized that the planes were lasting longer than projected - therefore the costs are spread out farther, thereby increasing profits. In reality, nix had changed. And that's not to say a bad thing, only at the same fourth dimension it speaks to how things can be manipulated and how people don't even know that the numbers they are reading might not exist what they think is the case. The boilerplate joe who looks up the visitor'south profitablity and sees information technology ascension would recall that something amazing has happened, rather than realizing that it was all math in the background. It makes you ponder.
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