Learn more about moneyandinvestments with this collection
The impact of opportunity cost on personal and professional life
Evaluating the benefits and drawbacks of different choices
Understanding the concept of opportunity cost
The language of cash flow
Profit is not cash. A healthy business needs both profit and cash.
Inflows: Cash moving into a business
Outflows: Cash moving out of a business
Types of cash flow:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
Financing a company: Getting a company the cash it needs to start up or expand.
Cash flow can be calculated by looking at the income statement and two balance sheets. When you know a company’s cash situation, you can understand what’s going on now, where the business is headed, and the priorities of senior management.
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Reason for increasing your financial intelligence
Understanding how the numbers are used and what are assumptions puts you in control of the decisions.
- Goodwill: The difference between the net assets acquired and the amount of money the acquiring company pays form them.
- Balance sheet: The bala...
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You can’t always trust the numbers
The art of accounting is taking a limited set of data to get an accurate description of how well a company is doing.
Definitions to understand.
- Revenue is when a service/product is delivered.
- The income statement shows sa...
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Four skill sets of finance and accounting
Financially intelligent managers understand the four distinct skill sets:
- The Foundation. They can read an income statement, a balance sheet and a cash flow statement. Can differentiate between profit and cash.
- The art of finance. They can iden...
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The income statement always affects the balance sheet
A good manager is aware of how both cash and profits affect a balance sheet. A balance sheet shows if a company is financially healthy.
The balance sheet answers the following questions:
- Do the assets outweigh the liabilities?
- Can the company pay its...
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Understanding the balance sheet
A balance sheet shows what a business owns at a particular time. A balance sheet always balances. Assets = liabilities + owners’ equity.
- Assets: What the company owns. It is more estimates and assumptions. Assets include cash; accounts receivable; inventory; property, ...
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Spotting assumptions, estimates, and biases
Accountants use accruals and allocations to attempt an accurate picture of the business for a month.
- Accruals: An accrual is the part of a revenue or expense item that is recorded for a specific period, e.g., product development costs. The purpose is to match costs to ...
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Cracking the code of the Income Statement
It consists of three main categories:
- Sales or revenue during a given time period. It includes sales (revenue) and Earnings-per-share (EPS)
- Costs and expenses: “Above the line” are the cost of goods sold (COGS), cost of services (COS). “Below t...
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