Financial Intelligence: The Dna of Business and Investments

By Kenny Tay FCCA

Finance and accounting has always been a complex and perplexing subject to many people. That is the main reason for the endless list of books and publications on finance and how to read financial reports. In fact, many people prefer to leave finance and its related matters to their accountants, finance partners or investment advisors. However, in business and investment, the subject of finance is just too important to be left to others while the direct stakeholders stay on the sidelines.
Financial intelligence as defined here, is about the capacity to understand financial relationships between economic events and the measurements of the outcome of business decisions. Without the capacity to understand financial relationships and outcome of business activities, the business executive and investor will always remain perplex and indecisive, even fearful of making wrong decisions.
This book is another contribution to demystify finance and hopefully help the reader develop ‘Financial Intelligence’ for his or her daily work or investment activities. As the Financial Intelligence is limitless, this book covers only the common aspects of every business and investment activities. In time, the reader will acquire further Financial Intelligence. To begin with, the language used here is deliberately made simple.

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: Apr 18, 2019
• ISBN: 9781543746686

Kenny Tay FCCA

Kenny Tay began his career with an affiliate of JP Morgan before establishing Finet Associates, as a financial skills development organization serving the emerging markets. He is currently the Chief Executive of the Australia New Zealand Institute, a work - based skills development organization. He is a fellow of the Association of Certified Accountant and holds a certificate in company law from Macquarie University, Sydney.

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Copyright © 2019 by Kenny Tay FCCA.

ISBN:                      Softcover              978-1-5437-4669-3

                                eBook                   978-1-5437-4668-6

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the author except in the case of brief quotations embodied in critical articles and reviews.

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

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CONTENTS

1.     INTRODUCTION

a.   Defining Corporate Financial Intelligence

b.   Corporate Financial Intelligence at Work

c.   Economic Environment and Relevance

2.     CORPORATE FINANCIAL INTELLIGENCE AT WORK

a.   The Corporate Organisation

b.   Economic Resources and the ROI

c.   Scope of Corporate Financial Intelligence

3.     FINANCIAL OVERVIEW

a.   The Corporation and its Business Requirements

b.   Types of Business Activities and their Funding Structures

c.   The Capital Structure of a Corporation

4.     FINANCING OF THE CORPORATION

a.   Financing Requirements for the Business Activities

b.   Financial and Capital Structure of a Corporation

c.   Fund Raising for a Corporation – Raising Capital and Debt

d.   Economic Environment and Financial Risk

5.     CORPORATE PROFITBILITY

a.   Business Profitability – Sales and Profit Margins

b.   Return on Investment – the ROI

c.   Business profitability – Costs and Pricing

d.   Economic Environment and Business Profitability

6.     ASSET MANAGEMENT

a.   Cash Flow of a Corporation

b.   Working Capital Management – Managing Inventories

c.   Working Management – Managing Trade Receivables

d.   Profit and Cash Flow

e.   Fixed Asset Investments

7.   FINANCIAL POLICIES AND DECISIONS

a.   Return on investment – a Measure of Success

b.   Financing mix

c.   Business Pricing

d.   Profit or Profit Margin

e.   Receivables Credit and Collection Policy

f.   Inventory Management Policy

g.   Minimum Cash Holding Policy

h.   Inventory of Basic Financial Policies of a Corporation

8.    INVESTMENT VIABILITY

a.   Return on investment revisited

b.   Cost of capital

c.   Risks in investments

d.   Risk of occurrence and risk discounting

e.   Valuation of Future Cash Flows

9.   VALUATION OF ASSETS AND INVESTMENTS

a.   Driver of Investment Valuation – Earnings per Share - EPS

b.   Methods of company valuation

10.   FINANCIAL INFORMATION RISK

a.   Nature of information

b.   Financial Information of Organizations and their Businesses

c.   Information Quality and Audit

d.   The Independent Audit Opinion

e.   Creative Accounting and Reporting

f.   How Creative Accounting Is Practised

g.   Mitigating financial information risk

11.   OVERVIEW OF THE FINANCIAL MARKETS

a.   The Financial System and its Components –

the Banking System

b.   The Financial system and its Components - the Capital Market System

c.   Key regulatory aspects of the financial system

APPENDIX

PREFACE

Financial intelligence may seem to be a natural attribute for many people while equally many assume that there is no such a thing as financial intelligence. There are also many others who would associate financial intelligence with information gathering and analysis for combating financial crimes such as terrorism financing. A search on the internet would bring out numerous definitions and literature on what financial intelligence is.

This book is a contribution to the discussion and understanding of financial intelligence for the ordinary person in a modern economic environment. Our environment gets more sophisticated by the day and our daily lives are inundated with business news, economic reports and financial data, all bearing some financial messages that can impact our outlook and decisions. A good understanding of theses financial messages hopefully will make some of us richer. A lack of financial understanding would probably lead to a loss of opportunities or even worse, making unprofitable decisions.

While some of us are business people from various industry backgrounds, there are many others who are investors watching and learning about the financial markets from home, retirees trying to manage their retirement funds and corporate employees engaged in business productivity and performance initiatives. It is in this context that the ability to understand financial matters of our daily lives becomes not only necessary but also crucial for proper financial decision making, whether for the business, the family or simply for personal investment.

The content of this book primarily addresses those readers who have minimal financial knowledge and understanding. Here we hope financial intelligence would be initiated and developed. There may be some readers with better knowledge and experience in the financial environment and for them this content may provide an alternative view to the understanding of these financial matters around us.

Corporate financial intelligence is the recognition and understanding of financial relationships of events that occur in an organization and with outside parties. This is important and useful for people who have corporate responsibilities or those with an interest or involvement in business and investments as well as for students of non - financial disciplines. There are also many people from different professional backgrounds and disciplines in our economic environment that are engaged in commercial activities. They include engineers, lawyers, marketing specialists and teachers. Hopefully, this book can contribute to the development of financial intelligence for them.

Throughout this book, the term ‘company’ and the ‘corporation’ are used interchangeably. The content of the book has been deliberately structured and written to enable easy understanding, especially for someone from a technical discipline or one with no prior financial knowledge. This is to facilitate reading and learning. There are numerous facets of finance to be discovered and developed but many of these cannot be treated in this book. The reader should continue to read further and apply some of the understanding achieved from this book as the process of developing his or financial intelligence over time.

This book hopefully, will serve as the stepping stone.

CHAPTER 1

1.   INTRODUCTION

a.   Defining Corporate Financial Intelligence

Corporate financial intelligence is the capacity to understand financial concepts, ideas and various financial relationships within the organisation, and applying them to the economic environment before arriving at an opinion and decision. The capacity to recognize the relationships between the value of a company and its earnings is an example. Similarly, a company which has a higher level of expenses is regarded as a higher risk one compared to one with a lower expense level for a good reason.

A decision made based on this corporate financial intelligence is then likely to result in a more rewarding outcome than the one made without corporate financial intelligence. Decisions are then made with a conscious understanding rather than as a matter of conforming to company policy and procedures or because of customers’ requests.

b.   Corporate Financial Intelligence at Work

In the work environment, executives of a corporation are constantly using economic resources to achieve business goals and budgeted outcomes such as planned sales level, higher profits or lower costs. Some of these executives are also responsible for generating revenue. Purchase of new equipment, approval of staff overtime claims and agreeing to a price discount requested by customers are everyday issues requiring attention of the executives of a business organisation. The executives need to understand the impact of these issues.

For them to achieve the desirable outcome, they would need to have information shared with them by the company but they, personally, also need to have a capacity to understand the financial relationships in business and at work. Absence of financial intelligence would not help in achieving a better outcome even if business reports, financial data and accounts are provided regularly to them.

c.   Economic Environment and Relevance

In the workplace, employees are encouraged to take ownership of their work activities and take pride in their work. This is great when the employees can relate their output to a set of values. They need to be able to link their efforts to the outcome in some kind of value that they can recognize or relate to. For instance, they need to understand how their error – free work would increase the profitability of their work teams or vice versa, and that for the company as a whole.

In other cases, a change of work process or a set of new procedures that saves time and effort need to be explained to the employees for them to see the relevance, impact and how their contributions are valued. If the effects of these are translated into financial terms, employees can relate better, and this can help create an ownership of the things they are doing or have to do.

By making a statement that everyone’s effort is important to the organisation and that has contributed to corporate success is rather hollow, other than, a reward of an extra month of bonus, which employees would forget very quickly after spending the money.

All of these suggest that the employees in the organisation need to have some financial intelligence for them to understand financial relationships and develop a sense of pride, value of their work and their belonging to the organisation.

CHAPTER 2

2.   CORPORATE FINANCIAL INTELLIGENCE AT WORK

a.   The Corporate Organisation

The corporate organisation of today, or a simply referred to as a company, is operated by many levels of employees, who are organized into various departments, each with identifiable goals and key performance indicators. Unlike an old-fashion company operating under the close supervision of its owner – manager, the modern corporation or company relies on its employees to perform tasks and activities and uses its resources such as equipment and materials.

The principles of mass mechanisation and specialisation of skills have contributed to learning, knowledge and skills acquisition revolving around the work responsibilities of the company employees. For instance, employees working on sales administration become specialized and expert in all matters relating to sales and related support activities. The factory production executives are similarly focused and build their key competence around their roles in the production processes at the factory and achieving the production quantities.

The emphasis on key performance indicators and key results areas only strengthen the belief that excellence at work only relates to the areas of responsibilities that each set employees are assigned to. The sales department therefore operates with its own goals while the purchasing department and internal audit department have theirs. In the course of all these pursuits, financial resources are expended, sometimes well spent, and at other times inefficient and wasteful.b

b.   Economic Resources and the ROI

Unless economic resources are abundant and cheap, there is a need to allocate resources to those activities that are most efficiently managed and with the most optimum outcome. In this regards, the Chief Financial Officer and his or her finance team, would be setting financial limits, collect information and measure the achievements or under-achievements, of the activities and overall company revenue success. Since most corporate activities cost money, it would be sensible to enquire and report on where the money spent has resulted in some positive contribution or otherwise. The benefits or contribution from the money spent is simply the return on investment or ROI in short. If expenses result in disproportionately low benefits, then such expenses would have to be reviewed and alternative actions considered. Here is where employees and executives who are