Thebook review should include the following:
- A synopsis of the book: what are the main points, topics, and highlights in the book
- How the book relates to the course. For example, what do the authors state is important to know in finance? Why? How does this align with the course?
- The points that resonated with you. For example, which chapter(s) or section(s) helped you understand a financial topic, ratio, statement, etc. better than before you read the book?
- The points that apply to your day-to-day life and/or work. For example, which chapter(s) or section(s) will you be able to use after the course concludes?
- Your personal opinion of this book. For example, did you enjoy reading it? Why or why not? Did you appreciate the style of writing or the approach to the topic? What do you wish the authors reviewed or covered that they did not?
Financial Intelligence, Revised Edition Inc. magazine calls it one of “the best, clearest guides to the numbers” on the market. Since its original release, Financial Intelligence has become a favorite among leaders and managers who need a guided tour through financial statements and financial concepts and analysis—an explanation not only of what it all really means, but also why it matters. This new updated edition brings the data up to date and continues to teach the basics of finance, and its art, to anyone who ever wanted to “talk numbers” confidently with their colleagues. It also addresses issues that have become even more important in recent years—including questions about the financial crisis and those concerning broader financial and accounting literacy. Accessible, jargon-free, and filled with entertaining stories of real companies, Financial Intelligence gives nonfinancial managers and leaders the confidence to understand the nuance beyond the numbers—and helps bring everyday work to a new level. You’ll learn about: Who the financial players are in your organization and what they do The many peculiarities of the income statement The basics of balance sheets The particulars of return on investment and how to calculate it jacket design: stephani f inks stay informed. join the discussion. Visit hbr.org/books follow @harVardbiz on twitter find us on facebook, linkedin, youtube, and google+ hbr.org/books man agement us$27 .00 / can$30 .00 Praise for the first edition of Financial Intelligence “It’s like The Elements of Style of finance.” —CFO.com “[One of ] the best, clearest guides to the numbers that I know of.” —Inc. magazine “On any given subject, it’s safe to say that most people don’t know what they’re talking about. That goes double for finance and accounting, a subject that leaves many nonprofessionals trembling. Take pity, and give them a copy of Financial Intelligence.” —Accounting Today “There is no shortage of books explaining the financial aspects of a company, but I have not come across one as useful as this for support people. Rather than simply presenting the usual basics of financial measurement— the income statement, balance sheet, and cash flow statement— as if they were science, the authors show why these are art as well.” —The Times (South Africa) “Authors Karen Berman and Joe Knight don’t want to turn managers into accountants; they just want managers at all levels to become financially literate.” —HR Magazine karen berman and joseph knight are the founders of the Los Angeles–based Business Literacy Institute. They train managers and leaders at organizations such as Electronic Arts, Goodrich, Gulfstream, and Visa. They have been interviewed in a wide range of media including the Wall Street Journal, Inc. magazine, and businessweek.com. karen berman + joe knight With john case h a r V a r d b u s i n e s s r e V i e w p r e s s A Manager’s Guide to Knowing What the Numbers Really Mean reVised edition Financial Intelligence berman knight case Financial Intelligence reVised edition ISBN-13: 978-1-4221-4411-4 9 7 8 1 4 2 2 1 4 4 1 1 4 9 0 0 0 0 To learn more, visit financialintelligencebook.com Financial Intelligence H6061.indb iH6061.indb i 11/21/12 8:25:25 AM11/21/12 8:25:25 AM H6061.indb iiH6061.indb ii 11/21/12 8:25:25 AM11/21/12 8:25:25 AM Financial Intelligence A Manager’s Guide to Knowing What the Numbers Really Mean KAREN BERMAN JOE KNIGHT with JOHN CASE H A R V A R D B U S I N E S S R E V I E W P R E S S B O S T O N , M A S S A C H U S E T T S REVISED EDITION H6061.indb iiiH6061.indb iii 11/21/12 8:25:25 AM11/21/12 8:25:25 AM Copyright 2013 Business Literacy Institute, Inc. All rights reserved Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change. No part of this publication may be reproduced, stored in or introduced into a retrieval sys- tem, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for per- mission should be directed to
[email protected], or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163. Library of Congress Cataloging-in-Publication Data Berman, Karen, 1962– Financial intelligence : a manager’s guide to knowing what the numbers really mean / Karen Berman and Joe Knight ; with John Case. — 2nd ed., rev. and expanded. p. cm. ISBN 978-1-4221-4411-4 (alk. paper) 1. Financial statements. 2. Cash management. 3. Corporations—Finance. I. Knight, Joe, 1963– II. Case, John, 1944– III. Title. HG4028.B2B422 2013 658.15′11—dc23 2012039043 The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1992. H6061.indb ivH6061.indb iv 11/21/12 8:25:25 AM11/21/12 8:25:25 AM Karen dedicates this book to her husband, her daughter, and her circle of family and friends. Joe dedicates this book to his wife, Donielle, and to the seven Js—Jacob, Jordan, Jewel, Jessica, James, Jonah, and Joseph Christian (JC). H6061.indb vH6061.indb v 11/21/12 8:25:25 AM11/21/12 8:25:25 AM H6061.indb viH6061.indb vi 11/21/12 8:25:25 AM11/21/12 8:25:25 AM C O N T E N T S Preface: What Is Financial Intelligence? xi PART ONE THE ART OF FINANCE (AND WHY IT MATTERS) 1. You Can’t Always Trust the Numbers 3 2. Spotting Assumptions, Estimates, and Biases 10 3. Why Increase Your Financial Intelligence? 17 4. The Rules Accountants Follow—and Why You Don’t Always Have To 26 Part One Toolbox: 36 Getting What You Want; The Players and What They Do; Reporting Obligations of Public Companies PART TWO THE (MANY) PECULIARITIES OF THE INCOME STATEMENT 5. Profi t Is an Estimate 43 6. Cracking the Code of the Income Statement 48 7. Revenue: The Issue Is Recognition 56 8. Costs and Expenses: No Hard-and-Fast Rules 63 H6061.indb viiH6061.indb vii 11/21/12 8:25:25 AM11/21/12 8:25:25 AM viii Contents 9. The Many Forms of Profi t 75 Part Two Toolbox: 83 Understanding Variance; Profi t at Nonprofi ts; A Quick Review: “Percent of” and “Percent Change” PART THREE THE BALANCE SHEET REVEALS THE MOST 10. Understanding Balance Sheet Basics 89 11. Assets: More Estimates and Assumptions (Except for Cash) 95 12. On the Other Side: Liabilities and Equity 106 13. Why the Balance Sheet Balances 111 14. The Income Statement Affects the Balance Sheet 114 Part Three Toolbox: 119 Expense? Or Capital Expenditure?; The Impact of Mark-to-Market Accounting PART FOUR CASH IS KING 15. Cash Is a Reality Check 125 16. Profi t ≠ Cash (and You Need Both) 129 17. The Language of Cash Flow 135 18. How Cash Connects with Everything Else 139 19. Why Cash Matters 148 Part Four Toolbox: 152 Free Cash Flow; Even the Big Guys Can Run Out of Cash H6061.indb viiiH6061.indb viii 11/21/12 8:25:25 AM11/21/12 8:25:25 AM ix Contents PART FIVE RATIOS: LEARNING WHAT THE NUMBERS ARE REALLY TELLING YOU 20. The Power of Ratios 157 21. Profi tability Ratios: The Higher the Better (Mostly) 164 22. Leverage Ratios: The Balancing Act 172 23. Liquidity Ratios: Can We Pay Our Bills? 176 24. Effi ciency Ratios: Making the Most of Your Assets 179 25. The Investor’s Perspective: The “Big Five” Numbers and Shareholder Value 185 Part Five Toolbox: 191 Which Ratios Are Most Important to Your Business?; The Power of Percent of Sales; Ratio Relationships; Different Companies, Different Calculations PART SIX HOW TO CALCULATE (AND REALLY UNDERSTAND) RETURN ON INVESTMENT 26. The Building Blocks of ROI 197 27. Figuring ROI: The Nitty-Gritty 203 Part Six Toolbox: 216 A Step-by-Step Guide to Analyzing Capital Expenditures; Calculating the Cost of Capital; Economic Value Added and Economic Profi t—Putting It All Together PART SEVEN APPLIED FINANCIAL INTELLIGENCE: WORKING CAPITAL MANAGEMENT 28. The Magic of Managing the Balance Sheet 225 29. Your Balance Sheet Levers 229 H6061.indb ixH6061.indb ix 11/21/12 8:25:25 AM11/21/12 8:25:25 AM x Contents 30. Homing In on Cash Conversion 234 Part Seven Toolbox: 239 Accounts Receivable Aging PART EIGHT CREATING A FINANCIALLY INTELLIGENT COMPANY 31. Financial Literacy and Corporate Performance 243 32. Financial Literacy Strategies 249 33. Financial Transparency: Our Ultimate Goal 257 Part Eight Toolbox: 259 Understanding Sarbanes-Oxley Appendix: Sample Financials 261 Notes 265 Acknowledgments 267 Index 271 About the Authors 285 H6061.indb xH6061.indb x 11/21/12 8:25:25 AM11/21/12 8:25:25 AM P R E FA C E WHAT IS FINANCIAL INTELLIGENCE? We have worked with thousands of employees, managers, and leaders in companies all over the world, teaching them about the fi nancial side of business. Our philosophy is that everyone in a company does better when they understand how fi nancial success is measured and how they have an impact on the company’s performance. Our term for that understanding is fi nancial intelligence. Greater fi nancial intelligence, we’ve learned, helps people feel more committed and involved. They understand better what they are a part of, what the organization is trying to achieve, and how they affect results. Trust increases, turnover decreases, and fi nancial results improve. We came to this philosophy by different routes. Karen took the aca- demic path. Her PhD dissertation focused on the question of whether in- formation sharing and fi nancial understanding on the part of employees and managers positively affects a company’s fi nancial performance. (It does.) Karen went on to become a fi nancial trainer and started an orga- nization