Table Of Contentmanagement berman us$27.00 / can$30.00
knight
case
Praise for the first edition of Financial Intelligence reVised
edition harVard business reView press Inc. magazine calls it one of “the best,
reVised
edition clearest guides to the numbers” on the
“It’s like The Elements of Style of finance.”
market. Since its original release,
—CFO.com Financial Intelligence has become a favorite
F among leaders and managers who need a
Financial
guided tour through financial statements
“[One of] the best, clearest guides to the numbers that I know of.” i and financial concepts and analysis—an
karen berman and joseph knight are the n
—Inc. magazine explanation not only of what it all really
founders of the Los Angeles–based Business
a means, but also why it matters.
Literacy Institute. They train managers and
n This new updated edition brings the data
leaders at organizations such as Electronic
“On any given subject, it’s safe to say that most people don’t know up to date and continues to teach the basics
Arts, Goodrich, Gulfstream, and Visa. They c
what they’re talking about. That goes double for finance and accounting, Intelligence of finance, and its art, to anyone who ever
have been interviewed in a wide range of i
a subject that leaves many nonprofessionals trembling. wanted to “talk numbers” confidently with
a
media including the Wall Street Journal,
Take pity, and give them a copy of Financial Intelligence.” their colleagues. It also addresses issues
Inc. magazine, and businessweek.com. l
—Accounting Today that have become even more important in
I
recent years—including questions about
n
the financial crisis and those concerning
To learn more, visit “There is no shortage of books explaining the financial aspects of a company, t broader financial and accounting literacy.
financialintelligencebook.com but I have not come across one as useful as this for support people. e A Manager’s Guide to Knowing Accessible, jargon-free, and filled with
Rather than simply presenting the usual basics of financial measurement— l entertaining stories of real companies,
l
the income statement, balance sheet, and cash flow statement— i What the Numbers Really Mean Financial Intelligence gives nonfinancial
as if they were science, the authors show why these are art as well.” g managers and leaders the confidence
to understand the nuance beyond the
—The Times (South Africa) e
numbers—and helps bring everyday
n
work to a new level.
c You’ll learn about:
“Authors Karen Berman and Joe Knight don’t want to turn
e
managers into accountants; they just want managers Who the financial players are in your
at all levels to become financially literate.” organization and what they do
—HR Magazine
The many peculiarities of the income
statement
The basics of balance sheets
The particulars of return on investment
jacket design: stephani finks and how to calculate it
ISBN-13: 978-1-4221-4411-4
90000
stay informed. join the discussion. karen berman + joe knight With john case
Visit hbr.org/books
follow @harVardbiz on twitter
find us on facebook, linkedin, youtube, and google+ hbr.org/books 9 781422 144114
Financial
Intelligence
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REVISED
EDITION
Financial
Intelligence
A Manager’s Guide to Knowing
What the Numbers Really Mean
KAREN BERMAN
JOE KNIGHT
JOHN CASE
with
HARVARD BUSINESS REVIEW PRESS
BOSTON, MASSACHUSETTS
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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.
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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).
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CONTENTS
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
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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
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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
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