Financial intelligence Training

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Transcript of Financial intelligence Training

  • Financial Intelligence Knowing what the numbers really mean Iyad Mourtada, CMA, CIA, CFE 1
  • 2
  • Why do smart managers make bad 1inancial decisions? 3
  • Financial Intelligence Emotional Intelligence 4
  • Neuron (nerve cell) is an electrically excitable cell that processes and transmits information by electrical and chemical signaling. Obtain Process Store Connect 5
  • Financial Information Gross Margin = 22% Operating Margin = 7.5% Net Margin = 2.8% Financial Financial Knowledge Numbers 6
  • The Continuum of Understanding Know (Cleveland 1982) Why Know How Know What Know nothing 7
  • ALLOCATION OF MENTAL SPACE 8
  • I was very creative with my accounting, but not creative enough. Finance is an Art 9
  • Financial Numbers 10
  • A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost? X:bat X + Y = 1.10 1 + Y + Y = 1.10 Y:ball X-Y =1 Y = 0.05 11
  • A person's inability to make sense of the numbers. Do you know how to deal with numbers? 12
  • 200 400 100 Customers 200 800 400 100 Potential Customers 13
  • $ Millions 132 131 130 129 01/2010 03/2010 14
  • Look at the big picture $ Millions 140 120 100 80 01/2009 01/10 03/10 15
  • Numbers tell a Story 16
  • Financial Information 17
  • Figuring out how much a company worth Share Price X # of Shares Present Value of Future Cash Flow 18
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  • Having more information is not always better 20
  • Turning Financial Information into Financial Knowledge 21
  • A company has more cash today when: A. Accounts receivable increases. B. Prot increases. C. Customers pay their bills sooner. D. Retained earnings increases. 22
  • Income Statement - How do you account for any expenses and revenues? - Who decides how you should account for any expenses and revenues? The management! - How do they know? They dont! They guess. Lots of accounting decisions are just that guesses. 23
  • Profit is an Estimate 24
  • - Accountants had to make judgments decisions when they record financial transaction - Financial managers need to make objective decisions based on these numbers that they get from accountants 25
  • Accountants should give the most accurate picture of the company's performance. (read footnotes) - All financial decisions are based on judgment. - Different methods produce different results. 26
  • Dont trust the numbers 27
  • It is very important that you ask questions about the numbers to make sure that they are what you think they are. 28
  • - There is always accounting judgment involved and that can lead to manipulation - Manipulation can benefit the company (It is not illegal) 29
  • - Accounting change that is material to the bottom line should be footnoted but who decide what is material and what isnt? Accountants - GAAP only provide guidelines 30
  • Are the accountants making the right judgment decisions? Questions: Who control your organization? 31
  • 32
  • Cooking the Financial Books Assumptions (What ingredients to include) Estimates (How much to include) You may assume that theyre accurate down to the last dollar. Not true! The balance in the cash account is exact, but virtually every other number you see in a financial report is based on an estimate. 33
  • Increase Revenue (Revenue Recognition) 34
  • - Sold equipments on four-year leases, including service and maintenance. - Booked all the revenues up front. - Xerox mis-stated four years' worth of profits, resulting in an overstatement of close to $6bn. 35
  • Channel Stuffing Company inflates sales figures by forcing more products through a distribution channel than the channel is capable of selling to the world at large. 36
  • Reduce Expenses (Matching Principle) 37
  • Income Statement 38
  • - Grow rapidly by buying other garbage companies. But didn't know to run them. - Changed the depreciation of their 20,000 tracks from 8-10 years to 12-15 years and did the same for their 1.5 million dumpsters - Took a pretax charge -a one- time write off- of 3.54 billion against its earnings 39
  • Which is more important? A. How much you make B. How much you keep C. How much you borrow D. How much you spend Net Prot 40
  • 41
  • Balance Sheet 42
  • Underreporting line costs (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. In June 2002, the company admitted it had inflated its profits by $3.8bn between January 2001 and March 2002. By the end of 2003, it was estimated that the company's total assets had been