Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Finance 101

81 views

Published on

A short introduction to finance : accounting, financial planning & analysis, corporate finance and project evaluation.

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Finance 101

  1. 1. Finance 101 Sébastien Derivaux 1/34
  2. 2. Outline • What is finance? • Accounting basics • Financial Planning and Analysis • Corporate Finance • Project Evaluation 2
  3. 3. tl;dr Finance = Turning everything into $ in order to make smart decisions 3
  4. 4. Financial Accounting Past & Present Highly normative What happened financially? Financial Planning & Analysis Past & Present & Future Specific for each company Why did it happened and what will happen? Corporate Finance Future Optimizing funding and allocation How to optimize the future? Project Evaluation Future Convert a project into $ What is the value of a project? 4
  5. 5. Accounting Measurement, processing, and communication of financial information about economic entities Management, state, banks, shareholders, suppliers, customers, … 5
  6. 6. Accounting basics • 1494 : Luca Pacioli, double-entry bookkeeping (credit & debit) • Debit = left, Credit = right (just a convention) • One equation: sum(debit) = sum(credit) • Eg : A selling goods to B for $100 (A view) • When B is paying the goods (which is later or earlier) Account Label Debit Credit B Customer Account Selling goods 120 Revenues Selling goods 100 VAT Account Selling goods 20 Account Label Debit Credit A bank account Paying for goods 120 B Customer Account Paying for goods 120 6
  7. 7. Balance Sheet Profit & Loss Bank Account : $980 Cust. B Account : $120 Revenues : $100Expenses : $10 Inventory : $1000 Car: $20 000 Equity : $10 000 Bank Loan : $12 000 VAT payable : $20 Supplier C Account : $80 Assets Liabilities & Equity RevenuesCost & Expenses Profit = $90Assets = $22 100 Liabilities = $22 100 Equity(N+1) = Equity(N) + P&L(n) (more or less) 7
  8. 8. Assets vs expenses • Assets vs expenses • If providing future value, not an expense but an asset • If I buy a meal, my company value decrease (expense), if I buy a computer it doesn’t (but my bank account decrease) • Amortization & depreciation represent the loss of future utility of an asset => Goes through Profit&Loss • Previous example N+1 Car: $16 000 Cost value : $20 000 Amortization : -$4 000 Assets Liabilities & Equity RevenuesCost & Expenses Amortization $4 000 8
  9. 9. GAAP Accouting • Generally Accepted Accounting Principles (Plan Comptable Général in France) • Avoid « creative » accounting and give fair view of a company • Eg annual subscriptions : you cannot recognize revenue in N where the provided service will be done in N+1 (even if payed) • Principles evolve with time (and scandals) 9
  10. 10. IFRS Accounting • International Financial Reporting Standards • Trying to give a more accurate view of a company • Example : • Company A acquire some land for $1M in 1980 • Company B acquire similar land for $2M in 2000 • The fair value of such land in 2018 is $3M • What is the value of the land in A & B accounts? • Cost model (French GAAP) : $1M for A and $2M for B • Revaluation model : $3M for both companies • Recipe for a financial crisis? 10
  11. 11. 4 Financial Statements • Statement of Income (P&L) • Balance Sheet • Statement of Cash Flows • Statement of Stockholder Equity 11
  12. 12. Google Statement of Income 12
  13. 13. Google Balance Sheet 13
  14. 14. GoogleStat.ofCashFlows 14
  15. 15. Google Statement of Stockholder Equity 15
  16. 16. Financial Planning & Analysis Understanding what is going on in the past, present and future 16
  17. 17. Introducing Non-GAAP metrics • Financial accounting is too objective to be useful • A non-GAAP income better represents the core performance of the company • Remove • One-time expenses (eg: litigation expenses, restructuring costs) • Sometimes amortization (non cash effect) • Depreciations (non cash effect) • Useful but be careful, the truth is always rosier in non-GAAP … 17
  18. 18. GAAP vs Non-GAAP (Sanofi case) (GAAP) (non-GAAP) 18
  19. 19. Management Accounting • A normative account list doesn’t provide much color. • Management accounting add news dimensions to analyze the business • Geography • Products • Business Units • Projects • While some accounting entries can be easily attributed (allocation) some are distributed (apportionment) • How to distributed the CEO salary amongst the business units? • By number of BUs? By FTE? By Revenues? By Income? • Or not at all (Corporate structure as a distinct business unit) 19
  20. 20. Management Accounting (Sanofi case) 20
  21. 21. Business modeling • Business simplification in order to explain the present and forecast the future • Actual vs forecast • Formulas and/or ad-hoc numbers from management • Forecasting is an highly political endeavor 21
  22. 22. Business modeling (restaurant in a an entertainment resort) Period Revenues Resort frequentation 1 10 2,0 2 15 2,9 3 8 2,1 4 13 2,4 -0,3 0,2 0,7 1,2 1,7 2,2 2,7 3,2 0 2 4 6 8 10 12 14 16 1 2 3 4 Revenues vs frequentation Revenues Resort visits Coef correlation : 0,90 Model Revenues = Resort frequentation * 5,09 22
  23. 23. Business modeling (restaurant in a an entertainment resort) Period Revenues Resort visits Forecast Actual vs forecast 1 10 2,0 10,18 -0,18 2 15 2,9 14,761 0,239 3 8 2,1 10,689 -2,689 4 13 2,4 12,216 0,784 5 2,4 12,216 6 2,9 14,761 23
  24. 24. Business Modeling (Fisy tool) 24
  25. 25. Corporate Finance Optimizing funding and resource allocation 25
  26. 26. Funding in a financial world • Two way of funding a company • Equity – Share of future results as dividend, indefinite duration • Debt/Bonds – Fixed rate of return and capital amortization • Price of both depends on the global economy and company specifics (fluctuate with time) • Using debt/bonds have a tax advantage • Weighted average cost of capital 26
  27. 27. 27
  28. 28. Currently, US companies are shifting equity to debt because debt rate are low. Since 2000, capital raised on the market is negative. 28
  29. 29. Decision rules • If there is a project with returns > WACC then invest • If you need capital raise debt or equity • Debt is usually cheaper up to a certain point (high yield) • If you have money but no project • Buyback equity and/or debt depending on prices and expectations • Should you develop the project internally or buy? • No differences from a finance point of view 29
  30. 30. Project Evaluation Convert a projet into $ What is the value of a project? 30
  31. 31. Project as cash flow discounting -100 -50 0 50 100 150 1 2 3 4 5 6 7 Project - Predicted Cash Flow Period in month vs years ? 31
  32. 32. Time value of money PV = Present Value FV = Future Value i = discounting rate / interest rate PV(FV = $1000, n, i) 32
  33. 33. 3 metrics to evaluate projects • NPV – Net Present Value • Discounting cash flows with i = WACC • Should invest if NPV > 0 • Good method but hard to compare two projects • If WACC = 8% => NPV = 12,03 • IRR – Internal Rate of Return • Find i where NPV = 0 • IRR = 10% (above WACC) • Invest first where IRR is greater • Payback delay • How long to wait for the investment to break even • Not good, but second more common method used after guts feeling for SME 33
  34. 34. Time to wrap up • Finance = Turning everything into $ in order to make smart decisions • Accounting • Credit/Debit • Balance Sheet, Income, Cash Flows • Very normative • Planning & Analysis • Getting insights from numbers • Forecasting the future with models (simplification of reality) • Corporate Finance • Debt vs Equity • Optimizing projects with funding • Project Evaluation • Time value of money • Net Present Value • Internal Rate of Return 34

×