Basics of Finance

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Guide to Finance Basics for Managers

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Guide to Finance Basics for Managers
Where do you begin if your boss asks you to prepare a breakeven analysis? Can you tell the difference between an income statement and a balance sheet? Between gross margin and revenue? Do you understand why a business that’s profitable can still go belly-up? Has your grasp of your company’s numbers helped—or hurt—your career? If questions like these make you sweat, you’ve come to the right place. This guide will give you the tools and confidence you need to master finance basics, as all good managers must. You’ll learn how to: ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■ ■■■■■■

Speak the language of finance Compare your firm’s financials with rivals’ Size up your vulnerability to industry downturns Shift your unit’s focus from revenues to profits Use financial data to defend budget requests Avoid running out of cash—and going out of business Keep costs from killing your bottom line Invest smartly through cost/benefit analysis Sell your brilliant idea with ROI Avoid putting too much faith in the numbers

Table of ConTenTs
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Finance Basics: Don’t Be Afraid
Finance Quiz: Do You Know the Basics? The Key Financial Statements: Balance Sheet, Income Statement, Cash Flow Statement The Fundamental Laws of Business by David Stauffer

Making Good Decisions—and Moving Those Numbers
Using Statements to Measure Financial Health Grow Your Profits by Streamlining Your Business by Jamie Bonomo and Andy Pasternak

Working Your Assets to Boost Your Growth
by Miles Cook, Pratap Mukharji, Lorenz Kiefer, and Marco Petruzzi

Profit ≠ Cash (and You Need Both)
by Karen Berman and Joe Knight, with John Case

Why Cash Matters
by Karen Berman and Joe Knight, with John Case

Your Balance Sheet Levers
by Karen Berman and Joe Knight, with John Case

What’s Your Working Capital Model? A Case Study
by John Mullins and Randy Komisar

Learn to Speak the Language of ROI
by John O’Leary

Practical Tools for Management Decisions: Making the Numbers Work for You

The Limits of Financial Data
What the Financial Statements Don’t Tell You
by John Case

The Five Traps of Performance Measurement
by Andrew Likierman

Finance Quiz: How Much Have You Learned?

Glossary

page 2

www.hbr.org

Finance Basics: Don’t Be Afraid
“What’s the ROI on that software your department wants to buy?” “The CFO says profits are great but money’s tight—everyone needs to conserve cash.” “I’ve been studying the figures, and it looks as if your sales reps are sacrificing gross margin for revenue. Have you talked to them about that?” “Our inventory days are creeping upward. We have to find a way to reverse that trend.” “I’m worried about our business. The financials suggest that corporate isn’t investing in our future as much as it used to.” Every corporate manager hears questions and comments like these—sometimes from a boss or a finance director, other times from colleagues in water-cooler conversations. Whatever the source, they all have one thing in common: They take for granted that you understand the fundamentals of finance. The people doing the talking presume that you speak the language, that you can read the financial statements, and that you can use basic financial tools to make decisions. But what if you’re not sure of the difference between an income statement and a balance sheet, or between profit and a positive cash flow? What if you can’t define inventory days or days sales outstanding, and you don’t know how to use those numbers to improve financial performance? If someone asks you to prepare a return on investment (ROI) analysis, do you get a sinking feeling in the pit of your stomach because you have no idea where to begin? Don’t despair. For one thing, you’re in...
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