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

1. Finance 101
Sébastien Derivaux
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2. Outline
• What is finance?
• Accounting basics
• Financial Planning and Analysis
• Corporate Finance
• Project Evaluation
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3. tl;dr
Finance =
Turning everything into $ in order
to make smart decisions
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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?
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5. Accounting
Measurement, processing, and communication of financial information
about economic entities
Management, state, banks, shareholders, suppliers, customers, …
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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. 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)
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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
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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)
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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?
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11. 4 Financial Statements
• Statement of Income (P&L)
• Balance Sheet
• Statement of Cash Flows
• Statement of Stockholder Equity
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12. Google Statement of Income
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13. Google Balance Sheet
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14. GoogleStat.ofCashFlows
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15. Google Statement of Stockholder Equity
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16. Financial Planning & Analysis
Understanding what is going on in the past, present and future
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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 …
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18. GAAP vs Non-GAAP (Sanofi case)
(GAAP)
(non-GAAP) 18

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)
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20. Management Accounting (Sanofi case)
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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
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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
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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
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24. Business Modeling (Fisy tool)
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25. Corporate Finance
Optimizing funding and resource allocation
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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
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27. 27

28. Currently, US companies are
shifting equity to debt because
debt rate are low.
Since 2000, capital raised on
the market is negative.
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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
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30. Project Evaluation
Convert a projet into $
What is the value of a project?
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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 ?
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32. Time value of money
PV = Present Value
FV = Future Value
i = discounting rate / interest rate
PV(FV = $1000, n, i)
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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
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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
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