 Well hello there everyone and welcome to the first video for Sailor Academy's MBA 601 financial management. This will be our first review of part one. Thank you for joining us. If you have any questions as we're going along feel free to leave them in the chat and we'll get to them or if you're watching this later feel free to leave your questions down in the comment section below and we could answer those potentially in a later video or it will definitely at least you know type you a little answer. But I won't waste any more of anyone else's time and I'll hand it over to Dr. Parasol to take it away here. Thanks Mike. This is the first lecture that we're going to be having on financial management. Lots of information to cover so we'll just take our time and go through this one part at a time. Let me start by just a quick introduction of myself I spent probably close to the first 30 years of my career in industry working for companies like the United Technologies Carrier and IBM have traveled and done business in some 30 or 40 countries around the world and I spent the last 16 years in academia so I'm delighted to be here and introducing you to finance as you start your MBA program to get started. Let me just review the fact that each of our courses has identified certain learning objectives. We think that these are important. These are like the milestones it's a blueprint for when I in fact design this course. And so briefly we want to make sure that as you go through this course we're giving you an opportunity to demonstrate a degree of accounting and financial literacy. That means being being familiar enough to talk about it to understand its place in business to be able to explain a firm's financial package. You've probably seen financial statements including income statements, retained earnings. What do each of those mean and what's their use in terms of running a successful business. More importantly I want you to be able to apply what we what you learn in this course to actual decision making in your own business and in your own careers. We want you to be able to evaluate a firm's performance and we'll spend some time going through basic financial analysis. Explaining the steps in developing a capital budget. Businesses spend money that's all addressed in a capital budget. How do we do that? How do we address cash flows? I want you to recognize the importance of free cash flow because it actually is a solid measure of your firm's performance. Last but not least we're going to do calculations. We're going to calculate time value of money and ways to evaluate investment opportunities and we're going to calculate the cost of debt and equity which basically is the capital plan for any business. These objectives are important. The objectives will tie back to the materials that you go through as you go through this course. The assessments are tied to these learning objectives. I went through and developed assessments for end of unit assessments and even for the final exam I paid close attention to making sure that they were reinforcing the learning objectives that we've established for the course. Now this course layout will be comprised of seven units. We're going to look at managerial accounting, financial statement analysis, financial management. We'll talk about risk and return, managing capital, valuation, and financial planning and forecasting. As you can see there's a lot of financial topics here and they cover a range of activities all of which relate back to the ability to operate and run a successful business. Now the unit one learning objectives for this first unit in the course are two, one let's go back to that demonstrated degree of accounting and financial literacy. What does that mean? I want you to be able to recognize the role that accounting and finance plays in business and describe the accounting system. And second when we talk about the firm's financial package you should be able to look at each statement and explain what it is, what does it mean and how is it used in business. So that's what we're going to try and accomplish in this first learning objective for unit one. In this first unit some of the topics that we're going to try and cover are going to be finance as the language of business and I'll explain each of these as we go through this review. Why numbers matter? What are the responsibilities of management? It's important that you're able to identify the stakeholders. We'll talk about both financial and managerial accounting. There is a difference between the two and we'll talk about the users of the financial data you prepare which are both internal to the firm and external. So as you can see there's a lot of area here and this is only in unit one. Now we will have weekly lectures on this course. Given the amount of information in unit one we're going to break that lecture into two parts. This first lecture is going to cover sections A and B of the guide that you have, the learning guide for the course and then in our next lecture we'll talk about section C. Now just a brief note on strategy for the course. You're going to be able to tell if you haven't already entered the course that there is a substantial amount of source material for the review. We've looked very carefully to identify material that I think will bring value to the subject and further your knowledge and understanding of what we're talking about. You must read all the material and read it carefully, determine what your best study practice is but if need be take notes for to go back and review later. Follow the study guide. It is a brief focus of some of the key issues that you'll see in each of the units we're going to cover. You'll need to prepare for the end of unit assessments. That means if need be review material review your notes and then go ahead and take that end of unit assessment and keep your notes because you'll need to review all of these as you get ready for the final assessment at the end of this course. So let me ask at this point if there's any questions so far. Okay, let's start looking at some of the things we want to talk about today. First of all finance. Finance is the language of business. Now why do I say that? There's lots of forms that your business can take. It can be sole proprietor, it can be a partnership, corporation, for profit or not for profit, it can be large or small. There's one thing in common that all these forms of business have and that's a focus on financial performance. If you started a business, if you've launched a business idea, it's to earn money, it's to make some money. If you're a large corporation, you have owners and shareholders that are looking for returns on investment. Over the years and dealing with lots of students getting their MBA degree and financial majors both especially in the adult learner community, you have careers, you're working in jobs. Why is finance important? My experience has been that it doesn't matter what your degree of interest is. If it's in IT management or marketing or sales or operations or manufacturing, depending on where you are in the organization, decision making is going to come down to a financial analysis. Let me give you an example. Back as director of marketing and strategic planning for United Technologies Carrier, when I went to a monthly executive renewal meeting for marketing, we really didn't discuss the products, the features and benefits of the product, the markets that they were going to or consumer interest. What the committee was interested in is what was the size of the investment we were going to make to support the launch of a product? What was it going to cost in terms of engineering support, advertising, sales initiatives, customer support? Most importantly, what was the return on investment that we were looking for by making this investment in this product launch? That didn't matter whether it was marketing or an IT strategy. Back as a principal at IBM, I led a consulting practice where our customers were CEOs and CFOs of Fortune 100 companies. As I sat there in those executive meetings and we talked about investments of tens of millions or hundreds of millions of dollars, our discussions weren't on the software but they were on the investment itself. How long it would take to get a return and what might be the impact then on the share price for these companies? Finance is the language of business. We need to become a little versed in that language. Why do numbers matter? They matter because we use them to tell us where we are and help us determine if we can go where we want to get to. In your personal life, you deal with numbers. Your income is your revenue. You have a job, you're looking for a job, you're earning an income, you'd like to advance in the company, you'd like to earn more income. You've determined that it's time to get a new card. You buy or lease or your investment in a home. The living expenses that you have on a day-to-day basis, those are numbers that matter to you. And then when you're done doing all of that at home and you go to the office, you get to play with more numbers. So we're going to talk about revenue and the importance of recognizing not only how much but when will this revenue be realized? The cost of buying or leasing a new piece of equipment for the business, which is a capital decision with financial implications, investing in expansion or controlling operating costs. Every business that I've been associated with in over 30 years in business has spent considerable amount of time managing costs because the better we control costs, the better impact we have on the profitability of the firm. Now when we talk about users of financial information, we don't do all of this in a vacuum. There's reasons for all of the analysis that we do and all of the data that we collect. Internally, our users are going to be the executives and management of the firm. Department managers and even employees, consider that as myself as a former president and CEO, I needed to have financial information as early on as when we started the basic strategic plan for the following year. We're doing a review of how well we were performing against expectations. As your department manager, you probably have a budget for your department. It may cover payroll, human resources, expenses, and even down to the employee level where depending on how well we perform against stated goals and objectives, it may have an impact on incentives and compensation. But we can't stop there because there are a bunch of external people that are also interested in what we do. Those external users include, first of all, shareholders or owners. In other words, those people who have invested money to gain an ownership stake in the business, excuse me, and they've invested that money because they have an expectation of return. There's lenders out there. Almost every business uses a certain amount of debt. In getting that debt, lenders are going to be interested in the financial wherewithal of your business. What is the risk of making an investment in your firm? What's the likelihood that you'll be able to support that debt and repay it? And even down to suppliers, as you start to determine that you have to buy materials or products from outside suppliers, will you have open credit and will you be able to pay on time or is that supplier going to require that you pay upfront? So all of these users are going to be looking at various forms of financial data that you're going to provide in this business as you go forward and move to make decisions and operate. Now, it's important that we know who our stakeholders are. Now, note here that I say stakeholders, not just shareholders. A stakeholder is any person or entity that has an interest in what's going on in your business. That can be affected by it. Typically we talk about three major stakeholders for most businesses. One of course is shareholders and or owners who have invested their money in the company with an expectation of return. Employees are stakeholders. They've joined the firm, perhaps saved their stake in the business. And certainly lenders have a stake because they have provided you with debt and finance. Yes. Okay. All right. Again at this one? No, no problem. So we want to identify the stakeholders for our business. Note here that I'm talking about stakeholders and not just shareholders. And so what is a stakeholder? That's a person or entity that has an interest in the success of the business. They're going to be impacted by the decisions that are made. Now certainly shareholders are stakeholders. Shareholders and owners have put their money into the business with an expectation of return. But employees in the company are stakeholders as well. They've joined the firm, perhaps involved and gotten involved in training. They're making efforts to help the company be successful. They have a stake in how well the business is performing. And certainly lenders. Almost every business at some point or another requires the use of debt. That use of debt coming from lenders who are going to be interested in how well positioned the business is to be able to support that debt. The ability to repay the debt. So they have an interest. Now there are other stakeholders we could address depending on the type of business or where you're located. It could even be the community where your business is located, where it may support a good number of members of the community or a local tax base. But if we just focus on these three, that will give you the idea of recognizing who your stakeholders are. Now owners and executives of businesses have an actual fiduciary responsibility to stakeholders. What does that mean? Fiduciary means that you will exercise good judgment in making sound decisions that will work in the interest of the stakeholders, especially for shareholders who have money invested in the business. Now this can be a bit harder than it sounds. For example, back when I was a president and CEO of a business, I often thought about my responsibility as stakeholders as sitting on a three-legged stool. All stakeholders do not have the same degree of concern over the same issues. Your employees may be looking for increases in compensation or health insurance while shareholders are looking for you to reduce expenses and increase profitability. The role of the executive is to identify those needs and make decisions that do the best possible of supporting each and every one of those shareholders in addressing those conflicts. Now let's talk about managerial accounting. We've mentioned decision-making, which is a key part of what managers do. You make decisions every day. Well, managerial accounting is about having the right kinds of data to make those decisions and make better decisions that are more effective and more impactful on the business. Now that means that there has to be a process for collecting data, maintaining it, and reporting the numbers that managers need. These are the internal users of financial data. Now a key requirement here obviously is that the data has to be correct, has to be usable, and it has to be prepared in a timely manner. In other words, we need to have the numbers when we need them in time to make decisions. We're going to talk more about how we use data to make decisions and control and evaluate what it is the business is doing. Some of these managerial reports are basically report cards, and they help show us what kind of job we're doing for our stakeholders. There's also an area of business called financial accounting. Now financial accounting focuses most of their time on also preparing reports on financial data, but they're preparing it for the external users. So companies will prepare quarterly statements for shareholders and owners. There'll be an annual financial report at the end of the year. Typically that financial statement, which we mentioned, is going to contain a lot of information on exactly what the firm did during the course of that prior year. And again, who's looking for that? Shareholders are keenly interested in what you're doing. But also think about potential shareholders. If you've considered investing some of your money, where do you go to invest? You probably start by identifying a company or an industry that you might be comfortable with or a little familiar with. Then you're going to want to look at the financial data. How well is the business doing? Are they performing? Are they growing? And more importantly, if they're growing, are they growing profitably? So financial accounting is going to look at preparing the kinds of information that the external users are going to be interested in learning about the firm. Now let me step back a minute and talk about management roles. And you're going to see this repeated a couple of times in this course. I think it's an important concept to have. With all my years of management, I think that I consider the fact that there's three key areas that managers are responsible for, three key roles that they play in any business that they're involved in. And again, this doesn't matter if it's public or private, small business or large business, sole proprietorship or corporation. Managers have specific roles. The first is planning. Planning means that you have to take the opportunity to step back and think about where you're going to go. Now, if you're watching your own business for the first time, think about the data and the information you're going to put together to construct your first basic business plan. So a lot of information in there about products and markets, materials that you're going to need, who your end consumers might be, competition. But a big part of that plan is going to be your financial forecast. What is it that you need to do? Where do you want to go? And how much money is it going to take to get there? That's the planning part of business. If you're an established company, we're going to start by taking a look back at what have you done in the past? What was last year, the last two or three years of business activity? What did it look like? Now, here's the key. This is like the first step in planning. But it's a historical look. All right, and one of Purcell's rules of finances that history helps identify trends, but it is not necessarily a predictor of the future. So we have to start there. We look at where you've been, but that's not enough. Because even if your trend has been up for the last three years, does that mean it will be up for next year? Not hardly. So what do you have to do? Now, you have to sit back and start using. We could look at the historical data as quantitative. It's numbers that already occurred. I have those. I can look at them. But now I need you to do some qualitative analysis for your planning. What's going on in the economy? What does labor look like? What's going on in the competitive marketplace? Are there new rules, regulations, or laws that can impact what business you're in and where you want to go? We could use today as an example. We look at supply chain issues. So the qualitative and the quantitative analysis are necessary part of planning. And every business that wants to survive and grow must engage in some degree of planning. Coming from a Fortune 100 company, I can tell you that I spent a considerable amount of my time year in and year out engaged in planning. Planning for the next quarter, planning for the end of the year, and planning for the long-range forecast two to three years out. Once the planning is done at some point, then the management role turns to one of controlling. Well, what are you controlling? You're controlling all the resources that are available to you in the business. Now, those resources include cash. They include time. And they include the human resource. So cash is capital. If you're starting a business, how much money is going to do you need to get the business up and running? What's the initial cash infusion? And depending on what your plan is for growing the business, when will more cash be required? At what point does the revenue coming in actually support the business? If you're an existing business, you're looking at things like capital expenditures. Do we need new equipment? Do we need to replace equipment? Will there be additional space required in facilities? Those decisions are going to be made as you determine where you're going to apply what are, in most cases, limited assets. And over 30 years in business, I've never had access to unlimited capital. So we plan for it, and we control it. And the third of these was the human resource. And I will tell you that my experience is that this may be the most important resource that you have. Human resource is the skill, the talent of the people that you bring into the organization. Are they going to be an asset that help you meet the objectives and grow the business, meet customer demand and satisfy customers? Those decisions come from the top down. This is where leadership really plays a role. If you are successful in getting the right people with the right skills and go a step further, if you can actually get those people engaged in the business, which means that they're active participants in seeing the business successful, then there is a direct correlation between employee engagement and business success. And if that's not enough, the third one is evaluating. Now, in your role as evaluator, your task is you've done planning, you've laid out budgets, you've established goals and objectives for all of the operating departments in the business. Question before you now is, how are you doing? Are we meeting those goals and objectives or not? If we're meeting our goals and objectives, good, but does that mean we could do more? Should we revisit the forecast? But what if you're not meeting the goal and objective? What if you've forecasted $2 million in sales in the first quarter and you're at half that? Well, decisions need to be made. One of the responsibilities of management is to identify where there are discrepancies or variances, determine a course of action, make a plan, initiate that plan, and then my personal favorite, come back and review it all again to make sure that you, in my words, keep the train on the track. And that's what evaluating is. Now, sounds simple, right? Imagine that you're doing all of these for your business, you're involved in this activity for a company that you're employed in, or you're involved in a company that's large and has many divisions, can be extremely complex, but businesses will spend a considerable amount of time on these and good managers understand this and are constantly using this to determine how well they're doing and the decisions that they're making. Now, at this point, any questions? All right, well, hopefully people can actually hear me this time, unlike last time, but I think what we're gonna do here is we're gonna, if you guys have any questions, go ahead and leave them in the chat right now. We're gonna pop off for one minute, see if our lag can catch up, and we'll see if we have any questions, because I think this is our last question break before the end, so I wanna give everyone a chance to catch up. So, everyone, if you have any questions, leave them in the chat, we'll be back in one minute. Well, hopefully everyone is a little caught up now, and we're all on the same page. No questions, I always mean, that must mean you're doing a great job teaching, so we'll just hand it back over to Dr. Pierceall, and he can get us going again. Great, thanks, Mike. And it couldn't be that you don't have any questions because I have overwhelmed you at this point. But not to worry, because all of this material is in the course, you've got plenty of time to look and review it. And by the way, you can come back and review these taped lectures at any time that you want to. So, let's look at a few wrap-up topics for this first lecture. One of the things that we talked about was understanding the accounting system. Now, what is the accounting system? Simply put, it is whatever process or system that you are using that actually tracks every financial transaction that the firm has. Now, what's a financial transaction? Anytime money moves into or out of the business, is a financial transaction. Now, you can imagine this can be fairly simple if you're a sole proprietor with one or two employees in a small business, you probably control all the financial transactions. You write checks when it's time to pay the rent or meet payroll or pay suppliers. You're recording the revenue when it comes in and making deposits into the company's checking account. That's accounting. But as the business grows, as you add more departments, more employees, perhaps more locations, then you can see how the transactions can become more and more complex. And it doesn't matter whether it is that small sole proprietorship or a multinational firm like United Technologies where I work, where you can imagine that transactions were thousands of transactions. If you look at the accounting system, there were thousands of accounts where financial transactions were recorded. The key here is that there is a system, there is a process that allows you to identify, to record, to validate, and then report on all those financial transactions. All the financial reporting we're talking about comes out of this system. Some place there is a repository for the financial data. And it's important that that be secure and accurate. Now, there's a whole area of accounting that talks about how we look at verifying. There can be internal and external audits and check reports. All key parts of ensuring that that data is accurate and reliable. So lots of transactions to cover in business and we wanna make sure that we keep track of each and every one of them. Now, for the internal users, again, we start talking about managerial accounting. And what is it that they're gonna use it for? Well, consider this. At the beginning of the year, one of my responsibilities was to work with my executive team and create budgets for the business. Each operating department created a budget, excuse me, for their operation. If you're the marketing department, your budget might consist of the number of people that'll be working in marketing. What are the office expenses to operate? What is the budget for advertising, for sales promotions, for training initiatives, for research, customer research and competitive analysis? So we put together budgets, which is great, but then what? Then we have to monitor what is the actual activity to that budget. And that's part of that keeping the train on the tracks. If you budgeted $10,000 for a particular marketing activity, did you in fact spend the 10? Did you spend less or did you spend more? This kind of analysis generates what we call variance reports. And a variance simply says, is there a difference between what you budgeted and what the actual, excuse me, expense was? Now, variance reports, I looked at variance reports on a monthly basis. We can look at debt. If you remember, we put together a capital plan. We did our initial strategic plan. Dr. Persil, I think we had another hiccup. I think we lost another like 20 seconds. Not too far after you said, we talked about, maybe restart from developing budgets. I'm not sure exactly where we lost you. Okay. But sorry about that. I'm not sorry about that. I'm not entirely sure. Zoom, let's blame Zoom. It happens. You ready? Yeah. Yeah, we're good to go. We use that data to develop budgets. As presidency over business, I created budgets for the business. Think about the budget for revenues for the year, how much revenue, but not just how much, but when that revenue would come in week by week, month by month, quarter by quarter. By comparing actual results against what we budgeted, we get a look at how well we're doing. It's a report card that reflects on the decisions that we made. Now we look at this and we say we were focused on variances. And a variance is simple. We don't have any difference between actual and budgeted results. So if the budget is for $1 million and sales this quarter, and our actual quarter results was $750,000, we have a negative variance. We have to stop. Take a look at and answer the question. Why? Why is the variance negative? More importantly, what are we going to do about it? How do we get back on track to make sure that we can meet what was budgeted for the year? Now this applies to every operating budget in the organization. You can use this to track sales, use it to track expenses. We can use it on debt. At the beginning of the year, we probably forecasted what we would require in debt. We don't wait until the last minute normally to determine we need debt. We need to make sure that we do a capital plan. Profitability. At the end of the day, users and owners and shareholders and even employees are interested in how profitable the business is. And so we could compare actual profitability with budgeted profitability. And also for investment opportunities, we're going to see later on, excuse me in the course. We talk about making a capital appropriation. We talk about investing in a piece of equipment or some other opportunity. There needs to be a way to evaluate the financial impact of that investment on the firm. And so we're going to use financial data. Excuse me. For our external users. Again, remember that they're very interested in how all the business is performing. Now who's going to look at this information? We mentioned suppliers. The larger the company chances are, the more outside suppliers you use, they have a keen interest in knowing your ability to pay the bills on what you purchased from them. And it can have an impact on credit terms. I mean, obviously there's advantage to your business. If you can acquire equipment from a supplier and pay for that at some point in the future, perhaps even after you've already sold it, but that's going to depend on the numbers. It's going to purchase the value of stock to shareholders or investors, but it's also, is it going to interest any potential investors? The number should create a story that says, look, this business is growing. It's successful. It's profitable. And it has every opportunity to continue to expand. We're constantly looking at the potential for an influx of new capital. We're constantly looking at the potential for the future. We're constantly looking at the potential for a new product that is much in determining the level of risk. In lending from banks and other lenders. Or even calculating one of my favorites tax liabilities for the various tax authorities. So these numbers are used. We get back to the importance of numbers. Here's why. This is why we have these numbers. This is why we focus on it. And this is why it's important. Now. and in today's lecture. For our next lecture, we're gonna look at section B of your guide. And we're gonna start getting into specifically a review of the financial package. There are examples, plenty of examples in the course itself and in the materials we provide. And by the way, there are plenty of examples online if you're interested in looking at the financials for a business that you may be familiar with or a company you're interested in. We're specifically gonna look at the classic financial package, including an income statement, which is a reflection of the revenue that came in and the expenses that went out and what the profitability of the firm was. Wanna look at the statement of retained earnings, which simply says, at the end of that year, is there any money left after you've met all your obligations, paid all your taxes, and perhaps even paid a dividend to shareholders? What money do you have in the accounts as you start and get ready to go into the next year? We'll look at the balance sheet, which is a representation of all the things that the firm owns and all that they owe. The difference between those two being owner's equity or what belongs to the owners of the firm. And last, the statement of cash flows. Cash is king, another one of PureSol's financial rules. And so we need to know the position of cash in the company. When is cash coming in? When is it going out? What's our cash balance? And here's a question I'll leave you with for the next lecture. Of those four parts of the financial package, which statement do you think is the most important? And we'll talk about that in our next lecture. All right, well, first let me just say, thank you very much for taking us through that. And thank you everyone for joining us. If anyone has any questions while we're wrapping up, feel free to drop them in the chat. If not, you can leave a comment below and we'll get to that maybe in next week, which again, next week, same time, same place. We're doing unit one part two. So everyone, again, thank you so much for joining us. I'm just kind of drawing this out as I do to see if anyone has any questions down in the chat. But I'm not seeing anything come through right now. So I'm just gonna go ahead and once again, thank everyone for joining us. Thank Dr. PureSol for leading us through this and hope everyone has a good day.