This is the eBook I wish I had in the fall of 2011. I had recently been chosen to participate in a leadership development program for early career PhD scientists and engineers. Our team had a project. We were asked to identify an approach to radically reduce costs in an important part of the oil and gas industry.
The problem? We had to understand what the costs were in the first place. And the best place to find those costs, by far, was in the financial statements of the relevant companies. But I had never read a corporate financial statement before. I had never taken a formal business class. I had a PhD in mechanical engineering, but I felt like I was starting from zero when it came to studying the financial performance of businesses.
I spent months picking up vocabulary. I slowly connected the dots between data strewn throughout corporate reports. Over time, I got more comfortable. I started to speak and write the language. I quickly learned more about the financial performance of oil and gas companies than most people I interacted with. My progress was self-reinforcing.
Over the years, I have widened my perspective. I study financial statements for all kinds of businesses. It’s fun to look under the hood of Coca-Cola, Disney, or Home Depot, for instance. Businesses are ubiquitous. We interact with them nearly continuously. I couldn’t help but want to know more about how they functioned, and which ones performed best.
More and more people at work were surprised by how much I knew about corporate finance. I don’t work in finance. I work generally in business data analytics, where I study data about our market, our own operations, our competitors, our customers. You name it. My job is basically to listen to the story the data is telling us, about any particular element of our business. And then I refine that story and share it with leadership.
Over time, I came to appreciate how much more marketable I was, having learned a bit about corporate finance. But the finance knowledge alone didn’t change the game. What made the biggest difference, was how I could combine a knowledge of finance with my existing subject matter expertise. It’s nice to know what you already know. Combine that knowledge with an understanding of how businesses serve their customers and make money, and you unlock a whole new level of career potential. And people around you notice.
Like I said earlier, I wish this was the eBook I had when I started my corporate finance self-learning journey. The first three chapters cover each of the three main financial statements, respectively:
- Balance sheet
- Income statement
- Cash flow statement
I begin each of these chapters with a simple example. I use a fictitious fruit stand business to explain how each financial statement should look, and to introduce some high-level rules and vocabulary.
I then go line-by-line through real statements, from the most recent annual reports of some of the world’s largest companies. I explain what each line means, what the dollar amounts are, and how the statement flows, as a result.
I do this for three different companies, for each financial statement. That way, you see how different companies report the same kinds of results. You see the range of possibilities. Comparing and contrasting between companies will help you understand the financial statements for any company you may have an interest in.
Here are the companies whose financial statements I explore, line-by-line:
- Johnson & Johnson
The final chapter is an introduction to corporate financial analysis. I explain how we can combine data points from different financial statements to learn more about the business. Specifically, I show the formulas for, and discuss the meanings of, items like the current ratio, the quick ratio, free cash flow, net debt, leverage, return on invested capital, and return on assets.
I isolate two competitors, and use their financial data to learn which is performing “better” than the other. Here are the pairs of companies I study in the final chapter:
- General Motors vs. Ford
- Intel vs. AMD
- Wal-Mart vs. Target
I talk about “better” performance, where “better” is in quotation marks, because corporate finance is almost all shades of gray. Very little black or white.
The actual numbers themselves are black or white, of course. That’s the point of having generally accepted accounting principles (GAPP), the rules that drive financial reporting.
We find gray when we try to assess companies. How much is a company worth? What will happen to its sales and earnings going forward? Which company is better positioned for success? Which company is executing more effectively on its stated corporate strategy?
You can crunch numbers all you like. The hard part, the part that requires courage, is the analysis. The last chapter of the book is an introduction this analysis. It shows you how to study a business, how to draw nuanced conclusions from the black and white numbers you find in financial statements.
Like I said, financial analysis requires courage. It also requires insight. You have to ask the right questions. Talking about the “financial performance” of any business is too broad. What are you most interested in? What part of the performance is most immediately relevant to you, as an employee, or a customer, or a supplier?
You’re in better position to answer these questions when you know the nuts and bolts of corporate finance. That’s why I wrote this book. You have the intellect. You have the curiosity. You have the drive and discipline. What you need is the grounding in corporate finance. You need to see behind the curtain, to pick up the vocabulary so you can ask the right questions.
This book is a straight line to that kind of financial knowledge. I’ve cut the filler you often find in other material. I go straight to the numbers, the vocabulary, and the context. I purposefully start with a simple example to introduce each concept, so we know what we’re looking for, when we later dive into real statements from real companies.
But I’m not just offering an ebook. I’m also offering a connection. A new member of your network…me. I include my email address in the book. I love talking with, and learning from, other scientists and engineers that are marching along their own corporate finance journeys. We can encourage each other. We can help each other past obstacles. We can come up with new ideas, new ways to make a difference professionally.
Finally, if you buy the book and don’t like it, or it doesn’t help you, or you just don’t want it for any reason at all…let me know. I’ll refund the purchase, no questions asked. The whole point of this, for me, is to help people learn what I have learned, without hitting all the dead ends I had to hit along the way.
I think scientists and engineers are criminally underutilized in the workplace. Learning corporate finance is the most reliable way to change that. Taking people fluent in the scientific method, and helping them learn the nuts and bolts of how companies function…there’s no more effective way to ensure we build better, more capable businesses in the future.
I’m glad you’re here. I know this book can help you get where you want to go. Get a copy, and then send me a note. Let me know who you are, what you’re trying to accomplish, and what’s holding you back. Together, we can help each other get where we’re trying to go.
Thanks for reading.