Finance Fundamentals for Executives

In this opening session, we will study and discuss financial statements. First, we will discuss the purpose, the structure, and the “rules” of the balance sheet – which portrays a firm’s assets and liabilities. Second, we will study the mechanics and information content of a firm’s income statement (“P&L”) – which measures how much profit/loss a firm generated. Third, we will discuss the importance and structure of the cash flow statement. Finally, we will work out how the various financial statements are connected. Our key objective thereby is to learn what information the different financial statements provide and how a firm’s economics are portrayed by these statements.

In the second session, we are going to discuss how one can use a firm’s financial statements to measure and learn about the various dimensions of its performance. First, we use a firm’s balance sheet and income statement to analyze its operational efficiency (in particular, the effectiveness with which it employs its working capital). Second, we turn to measuring a firm’s profitability, employing various measures such as (operating) margin, return on invested capital (ROIC), and return on equity (ROE). We also discuss the link between financial leverage and risk.

There are two broad categories of decisions management takes: investment and financing decisions. Managing for value creation involves understanding how each of these affects the value of a company. In this session we will discuss the first type of decisions: which projects to invest in. First, we will discuss the importance of cash flow in assessing the economic value of an investment project. Specifically, we will study the key rationale behind free cash flow and develop a simple template for estimating it. Second, we will discuss how one can take into account the timing (and risk profile) of the cash flows; that is, we will study the mechanics of discounting. Finally, we will study the main capital budgeting rules. That is, we will introduce the Net Present Value (NPV), the Internal Rate of Return (IRR), as well as the Payback rule, and discuss their advantages and limitations.

In this session, we will primarily focus on firms’ financing decisions. First, we will discuss how firms can assess their short-term and long-term financing needs and connect them to their (strategic) investment plans. Second, we will study how firms can “fill” any anticipated financing gap. Specifically, we will study and compare the key characteristics of debt and equity financing and talk about the process of raising new capital. Next, we will turn to firms’ financing costs. That is, we will discuss the estimation of a firm’s weighted average cost of capital (WACC) and what role it plays within firms. For that purpose, we will also carefully analyze the costs associated with debt and equity financing; that is, we cover the estimation of a firm’s cost-of-debt and cost-of-equity.