Finance for Nonfinancial Managers, 2nd Ed., by Gene Siciliano.

April 6, 2017

Book Review

The life cycle of a successful company progresses through periods of rapid growth, slow growth, no growth, decline, and demise.  An adaptable company may endure with successive cycles of renewal, rebirth, and resurgence.  This book describes a pathway to success.  Finance is a sub-theme; other themes are accounting and management.

Accounting

A general ledger of all transactions is used to prepare all financial reports and assess the company’s performance. Companies that issue publically traded stock are required to publish 3 financial statements every quarter of the fiscal year. They are:

  1. Balance sheet
  2. Income statement
  3. Cash flow

The Balance sheet is a snapshot of the company’s financial condition at the end of the fiscal period. Items are reported under headings that conform to this equation:  Assets = Liabilities + Equity.  Assets and Liabilities are subdivided into Current and Long-term transactions. Current transactions are expected to be completed in the next 12 months and indicate the company’s liquidity. Long-term transactions indicate the company’s leverage, plus more. Equity is the company’s net worth. Within this framework, the author explains and discusses items of special relevance to business management.

The Income statment describes business operations during the time period between 2 balance sheet dates. According to rules for accrual accounting, every transaction has an order date and delivery date. Subtotal transactions are grouped under revenues, production, operations, other transactions, and net income. Net income (i.e., company profit) is the bottom line of accrual accounting in the Income statement. Readers of this chapter learn how to evaluate the business and its managers.

More businesses fail due to the lack of cash than the lack of profit. Consequently, it’s important that the Cash Flow statement reports a net cash balance from the net cash flows of operations (CFO), investing (CFI), and finance (CFF). The CFO is derived from Net Income (in the Income statement) by excluding non-cash transactions listed in the Income statement such as depreciation, receivables, pre-paid expenses, inventory, and payables.

Finance and Management

The remaining chapters are devoted to these topics:

  • Key performance indicators (KPIs) for evaluating financial statements.
  • Cost accounting, the analysis of manufacturing productivity.
  • Finance of new projects by previewing the return on investment (ROI), weighted cost of capital (WACC), and internal rate of return (IRR). Never invest in a project that has a negative IRR.
  • Breakeven point, to determine such things as the price of a product’s launch and risk assessment.
  • Creating a business plan to guide business operations and attract financial resources.
  • Annual budget, part of the business plan.
  • Financing the company by getting a loan (debt) or selling shares (equity).
  • Entrepeneurship.

#SmallTradesFinancialAnalyzer

December 16, 2013

[Revised on 12/17/2013]

Click on this link, SmallTradesFinancialAnalyzer, to download a spreadsheet program for analyzing the financial status of a company.

The skeptical investor makes a financial analysis to confirm the advice of well-meaning tipsters, decisions of investment clubs, results of stock screens, or other sources that point to ‘good’ investments. Unless you’re proficient at reading financial statements without assistance, consider using the spreadsheet program to organize financial data for a systematic review. The process takes about an hour if you can download the latest set of annual and quarterly financial statements from the internet. I download the statements from my brokerage account at Schwab.com (1). I assume, without knowing for sure, that other brokerage firms provide the same data. If not, the data can be extracted from SEC filing forms 10-K (annual report) and 10-Q (quarterly report). At this time (December 2013), the Yahoo Finance (2) website provides historical prices.

The analysis program is used in Microsoft’s Excel worksheet platform. There are 11 pages that provide for data storage, entry, and analysis. You begin by downloading financial data onto 7 blank pages labeled Aincome, Abalance, Acash, Qincome, Qbalance, Qcash, and 6Y historical prices [e.g., Aincome signifies the annual income statement, Qbalance signifies the quarterly cash flow statement, and 6Y historical prices is reserved for the date and closing price of the stock]. After downloading the data, copy and paste selected information into blank white spaces of the data entries page. The data entries page is organized from top to bottom into annual statements, quarterly statements, and historical prices. Cells with a red triangle in the corner contain hidden comments that appear when passing the cursor over the cell. The blue-font reminders disappear when data are entered in the appropriate cells. Enter 6 years of historical prices.

The program computes and displays information in the form of charts and tables located in the pages for financial charts and market valuation. The financial charts page is organized into charts on the left hand side and legends on the right hand side. At the top of each chart is a title that contains either an error message or the title of the chart. The error message warns that incomplete information may be corrupting the charted data, in which case you should review the data entries page for missing or incorrect data. The legends contain questions and explanations; the questions are relevant to what most investors want to know about the company’s operations and financial success (3-7). The market valuation page is organized in the same way; charts on the left and script on the right. The top of the page has a link to industry stats published by Yahoo Finance (2). Industry stats are useful for placing the company’s market valuation into a broader perspective. The last page, notes, provides a general explanation of financial statements based on author Thomas Ittelson (3).

The financial analysis program is only useful if you can easily locate and enter the required information; even so, it takes about 15-60 minutes depending on your familiarity with the process.  The charts and tables illustrate the company’s profitability, business model, growth strategy, management efficiency, ownership, and market valuation.

If the program inspires your investing to support the betterment of society, consider making a tax-deductible contribution to your favorite charity or my favorite charity.

Copyright © 2013 Douglas R. Knight

References

1. Schwab.com. Charles Schwab, https://www.schwab.com/, © 2013 Charles Schwab & Co., Inc.
2. Yahoo Finance, http://finance.yahoo.com/ .
3. Thomas R. Ittelson. Financial Statements, A Step-by-Step Guide to Understanding and Creating Financial Reports. Career Press, Franklin Lakes, 1998.
4. Leita A. Hart, Accounting Demystified. McGraw-Hill, Chicago, 2006.
5. John A. Tracy, How to Read a Financial Report, 6th Ed. Wiley, 2004.
6. Christopher H. Browne, Forward by Roger Lowenstein. The Little Book of Value Investing, John Wiley & Sons, Inc., Hoboken, 2007.
7. Joel Greenblatt.  The Little Book that Still Beats the Market.  John Wiley & Sons, Inc. 2010.


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