An MBA in a Book: Everything You Need to Know to Master Business - In One Book!

By Xander Cansell

This highly-visual full-color guide covers everything taught on an MBA course, perfect for MBA students or anyone who wants to become a more effective manager.

Filled with flow diagrams, timelines, case studies and infographics, this accessible book presents information in an easy-to-digest way. It covers the curriculum taught in all the top business schools around the world, with real-life case studies to show the theory in practice. Discover what drives good business and the key skills and principles which underpin the commercial world.

Chapters include:
• Accounting
• Macroeconomics
• Microeconomics
• Data Analysis & Statistics
• Organizations & Management
• Marketing & Sales
• Operations & Technology
• Strategy
• Startups and entrepreneurship

This is the perfect guide to help you achieve a successful career in business management.

ABOUT THE SERIES: Get the knowledge of a degree for the price of a book with Arcturus Publishing's A Degree in a Book series. Written by experts in their fields, these highly visual guides feature flow diagrams, infographics, handy timelines, information boxes, feature spreads and margin annotations, allowing readers to get to grips with complex subjects in no time.

• Language: English
• Publisher: Arcturus Publishing
• Release date: Jul 1, 2023
• ISBN: 9781398826960

Book preview

INTRODUCTION

Business surrounds and supports our lives, influences our culture and shapes our environment. Almost everything in the modern world now includes some element of commerce, so it is more vital than ever that we understand what drives good business, and crucially what ‘good’ means in the modern business world.

The MBA curriculum is designed to provide students with a comprehensive understanding of business and its broader context. Although business is ever-changing, there are always going to be key skills and principles which underpin the basic functions, forecasts, and philosophies of the commercial world.

The MBA is aimed at developing ability across all these areas – to produce detail oriented, versatile and strategic thinkers who can thrive in a modern business world.

This is a world in which businesses must be sustainable in both senses, not just aimed at profit, but also intent on having a positive impact on society. This book explores some of these ideas.

Many of the skillsets from an MBA are applicable in a wide range of situations and industries. Critical and analytical thought, effective leadership and teamwork, creativity, and the capacity to communicate clearly are useful almost everywhere.

This book is designed to give you an overview of the skills covered by an MBA – to introduce you to the concepts and principles with which to analyze, describe and create businesses.

Although the topics which are a standard part of MBA courses around the world are covered in this book, the limitations of space mean that there is always more to say on any subject (and a few things that didn’t make the final edit). If something you’d like to explore or learn isn’t written about here, seek it out elsewhere – there is an abundance of resources available, some of which you can find in the further reading section. Curiosity is the best qualification for success.

Modern businesses need to be flexible and able to move swiftly to embrace change. Over the past few years many have used new technology to allow them to connect virtually with staff working from home, clients and partners, without the need for travel.

Chapter One: Accounting Basics

The basic principles of accounting form a key part of the language of business, allowing us to talk about the story of a company. This can be expressed in the different financial statements and through information from their regular accounts.

Accounting is the process of making, and keeping an accurate record of, the financial transactions of a business. It can track not just the amounts, but also how money comes into a business, what is done with that money, where and how it leaves a business and how much is left over as profit.

To be able to understand this information and read the story of a company, you will need to understand the fundamental concepts of profit and loss, debits and credits, and value to accurately describe the position of a business – where it has been and where it is likely to go in the future. Before we look at the story of a company through its financial statements, there are some fundamental concepts that need explaining.

THE VALUE OF MONEY NOW

The time value of money (TVM) is the idea that money you have now is worth more than the same amount of money in the future because of its potential to earn – for instance, interest in a savings account or as an investment – between now and then. Money you have now is worth more to you now than the same quantity of money paid to you in the future. This is also known as present discounted value.

Money grows through investing (in this context, this can mean either investing in stocks or shares, interest from a savings account or another method of earning money based on the initial amount).

The formula for working out the time value of money (how much a future payment is worth now, or how much a payment now will be worth in the future) looks at the amount of money, the future value, the time period involved and the amount it can earn.

A fortunate example

As an example, let’s imagine you are lucky enough to have the choice of being given £100,000 now or £100,000 in two years’ time. The two amounts look equal, but £100,000 today has more value (and utility) because of opportunity costs* associated with the two years that you don’t have access to the money – the things you can’t do.

The formula to work out the actual value of these two amounts is comprised of these parts:

• FV = future value of money

• PV = present value of money

• i = interest rate

• n = number of compounding periods per year

• t = number of years

And the formula itself is:

**FV = PV[1 + (i/n](nt)**

There can be some other slight changes to the formula when dealing with things like annuities, but the general formula is as above.

If we assume that £100,000 is invested for one year at 10% interest compounded annually, then the future value of that money is:

FV = £100.000 x [1 + (10% / 1] ^ (1 x 1) = £110,000

We can also rearrange the formula to find the present value of a future amount. For example, the present-day amount compounded annually at 7% interest that would be worth £5,000 a year from now is:

PV = £5,000 / [1 +(7% / 1] ^ (1 X 1) = £4,673

The number of times compounding happens (how often interest is earned) has an impact on the value. Using the first example of £100,000, this is how is impacts the total value:

• Quarterly compounding: FV = £10,000 x [1 + (10% / 4)] ^ (4 x 1) = £110,380

• Monthly compounding: FV = £10,000 x [1 + (10% / 12)] ^ (12 x 1) = £110,470

• Daily compounding: FV = £10,000 x [1 + (10% / 365)] ^ (365 x 1) = £110,520

COMPOUNDING ▶ Moving money forward through time.

DISCOUNTING ▶ Moving money backward through time.

NET PRESENT VALUE

Net present value (NPV) is a concept that allows for the time value of money. You can use it to compare similar investment options. It relies on a discount rate that comes from how much you need to invest – the cost of capital. A project with a negative NPV is not usually a good idea.

A positive NPV suggests that the projected earnings generated by a given investment – in present value – exceeds the present value of expected costs (these are also given in ‘present money’). It is usually assumed that an investment that has a positive NPV will be profitable.

The NPV calculation is asking the question ‘What is the total money I will make if I go ahead with this specific investment, when accounting for the time value of money?’

THE DISCOUNT RATE

A discount rate is the rate of return (the net gain or loss of an investment over a particular period) used to discount future cash flows back to their present value. This can be the required rate of return for an investor (the minimum percentage amount they would expect to earn on their capital), a company’s weighted average cost of capital (see Chapter 6) or the hurdle rate, also known as the minimum acceptable rate of return for an investor.

Also, a company can determine the discount rate using the expected return of alternative projects with a risk level that is similar (or the cost of a loan to finance the project). For example, they might avoid a project with an expected return of 11% per year if it costs 13% to finance the project or if an appropriate alternative project is expected to return 16% per year.

The formula for NPV is:

A slightly simpler method of thinking about this concept is:

NPV = TVECF − TVIC

where:

TVECF = today’s value of the expected cash flows

TVIC = today’s value of invested cash

A useful example

A theoretical company can invest in a Really Useful Machine that will cost £1,000,000 and is expected to generate £25,000 a month in revenue for five years. The company has the money available to buy the machine but could otherwise invest it in stocks and shares for an expected return of 8% per year. The company feel that buying the machine or investing in the stock market are similar risks.

Step 1: the initial investment

Because the machine is paid for straightaway, this is the first cash flow to be calculated. No time has passed so the outflow of £1,000,000 doesn’t need discounting.

• Identify the number of periods (t): The machine is expected to create monthly cash flow and continue to work for five years. This means that there will be 60 cash flows and 60 periods to be accounted for in the calculation.

• Identify the discount rate (i): The other investment option is anticipated to pay 8% per year. But because the machine results in monthly cash flows, the annual discount rate needs to be turned into a monthly (or periodic) rate. Using the formula below, you can see that the periodic rate is 0.64%.

$Periodic\space Rate = ((1 + 0.08) ^\frac1{12}) − 1 = 0.64%$

Step 2: future cash flows

The cash flows are earned at the end of the month, with the first payment a month after the machine was bought. This payment happens in the future, so you need to account for the time value of money. You can see the first five payments here:

The total calculation of the present value is the same as the present value of all 60 of the future cash flows added together, minus the initial investment. In this example we are ignoring any salvage value for the machine at the end of this period (whether it could be sold on to another company, for instance). This is the formula:

That formula can be simplified to the following calculation:

NPV = -£1,000,000 + £1,242,322.82 = £242,322.82

So here the NPV is positive – the company should buy the machine. If the NPV of this calculation had been negative, because the discount rate was higher or the net cash flows were lower, the company should have avoided the investment.

The downsides: working out profitability with NPV relies a great deal on estimates and assumptions, so there can be quite a lot of room for mistakes. Estimated elements can include things like cost of investment, the discount rate and the projected returns.

The balance sheet

The balance sheet is one of the most important financial statements, which helps tell the story of a business. It shows a company’s total assets and how these assets are paid for, either through debt or equity. It can also sometimes be called a statement of net worth or a statement of financial position.

A balance sheet uses the important accounting equation:

Assets = Liabilities + Equity

The balance sheet only displays a snapshot of the finances of a company at a single moment in time, so to get a sense of trends, you need to compare it to balance sheets from previous periods.

However, balance sheets by themselves are still useful to investors. There are certain ratios that you can establish from a balance sheet that assess the financial health of an organization, such as the debt-to-equity ratio, or the quick ratio (also known as the acid-test ratio).

This is the general layout of a balance sheet. Assets are put on the left and liabilities and equity are put on the right.

A balanced example

If a business takes out a five-year, £20,000 bank loan, their assets (in terms of the balance sheet, specifically their cash account because they now have this money in cash, available to spend) will increase by £20,000.

At the same time, its liabilities (in this case, the long-term debt account) will also increase by £20,000, balancing the two sides of the equation.

Similarly, if a business were to receive £50,000 from investors, their assets will increase by that amount, as will their shareholder equity. What’s key here is that the balance sheet always keeps the two sides of the equation balanced.

The accounting equation

T-accounts

T-accounts are used to record increases and decreases to the individual accounts found on a balance sheet. They are called T-accounts because of their shape.

The entry on the left side of a T-account is called a debit, the entry on the right is called a credit.

THE ACCOUNTING EQUATION – LIABILITIES AND EQUITY

This is the fundamental basis of the double-entry accounting system. If you sell a chocolate bar for a dollar, you need to account for both the chocolate bar and the dollar.

The accounting equation shows on a balance sheet that the sum of the assets of a business are the same as the sum of the liabilities of the business and the shareholders’ equity.

Here are some definitions of the terms you can find on a balance sheet. These are the basic elements:

• Assets: Items of value the company owns. For instance, equipment, cash.

• Liabilities: Money the company owes to others. For instance, loans, mortgage on property.

• Equity: The portion of assets the company owns outright with no debt.

–  Equity = Assets - Liabilities

• Revenue/income: Money the company is earning.

• Expenses: Money the company is spending. For instance, rent, advertising.

Below is an example balance sheet for an imaginary company. As you can see, the two sides have two equal totals at the bottom of each column.

It should be easy to understand why this formula works. A business needs to pay for all the things it owns (assets) by either borrowing the money (taking on liabilities) or taking it from investment (issuing shareholder equity or using existing money kept from previous profits to effectively invest in themselves).

Assets = Liabilities + Equity

Example balance sheet

*The balance sheet follows the accounting equation above, with assets on one side, and liabilities plus equity on the other, balancing each other out:

In T-accounts, a debit represents an increase in an asset, but a decrease in a liability or equity. Equally, a credit represents a decrease in an asset but an increase in a liability or equity (see example below).

Asset accounts normally have a debit balance and liability, and equity accounts usually have a credit balance. This is because each of these accounts usually have positive balances.

Whenever one of these T-accounts is debited, another will be credited, so that the balance sheet remains balanced after every transaction.

ACCOUNTS

In this context, an ‘account’ is a record of business transactions that tracks the activity of a specific asset, liability, expense, revenue or equity.

• Asset accounts normally have a debit balance and are presented first on the balance sheet.

• Liability accounts normally have a credit balance and come after the assets on the balance sheet.

• Equity accounts represent the stake in the business held by the owners.

• Revenue accounts track the income that the business generates. They have a credit balance and increase total equity (they are a kind of temporary equity account).

• Expense accounts show the resources used to generate income for the business. They have a debit balance and reduce total equity.

The general journal and the general ledger

Although the balance sheet is a crucial statement of a company’s accounts, it is not the first place where transactions are usually recorded, and it doesn’t include every individual business transaction. The general journal is the first point of record for all the transactions in an accounting system. The journal is a record of the accounting transactions for a business. These are recorded in chronological order and demonstrate how each account is credited or debited for each transaction.

Along with helping to create the income statement and the balance sheet, the journal means that transactions down to the day level can be compared as needed (whether or not you sold more gadgets on a Wednesday or a Thursday, for instance).

Each transaction has a date, credits are recorded on the right, debits on the left and the debited account is listed first.

DEBITS AND CREDITS

Debits and credits mean specific things in accounting. Unlike in general use, when using the words in relation to accounting, debit means adding to an account, and credit means taking away from an account.

Debits always have matching credits. Every time you credit one account, you must debit another to match. This is called double-entry bookkeeping.

Debits always go on the left, credits to the right.

Example of T-accounts

1. If you bought £1,000 worth of inventory for your business on credit, this is how the entry would appear in the journal:

2. Left is an example of how a sale might then be recorded. £500 paid in by a customer (debit the Cash account, credit Revenues) for an item that cost £300 (debit Expenses, credit Inventory):

3. The general ledger keeps track of all the account balances, which help to build the balance sheet. It is composed of a series of T-accounts (see box). At the end of each accounting period (usually monthly), all the entries from the general journal are categorized and totalled so they can be added to the general ledger.

4. The final balances of the permanent accounts appear on the balance sheet like this below left:

Below, the temporary accounts (Revenue, Expenses) are closed to zero after they’ve had their balances moved to the income statement (see page 17).

This is a layout of how this accounting process works.

Other financial statements

Financial statements such as the balance sheet are reports prepared and issued by a business to give investors and creditors extra information about the performance and financial standing of the business. Along with the balance sheet, there are three other kinds of general-purpose financial statement: the income statement, the cash flow statement and statement of stockholders’ equity.

GROSS PROFIT ▶ Subtract cost of goods sold (COGS) from revenue

OPERATING PROFIT ▶ The net income coming from a company’s primary business operations.

An income statement, sometimes known as a profit and loss statement, is a financial statement that shows revenue (income), expenses and the resulting profit and losses of a business over a specific time frame.

The net income of a business is calculated by deducting total expenses from total income. This statement is prepared first, as the net profit (or loss) must be determined and then used in the statement of owner’s equity so other financial statements can be written. In an income statement, revenues are presented before expenses.

EBITDA

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a financial metric that measures the operating profitability of a business.

An EBITDA calculation shows the amount of cash flow that is generated by a business from its operations. Investors often use this calculation to analyze a company without having to look at the financing costs, tax burden and accounting treatments of the business.

Because EBITDA is not a ratio, it isn’t generally used to directly compare businesses of different sizes.

The cash flow statement

A cash flow statement reflects how changes in the balance sheet accounts have an impact on the cash account during an accounting period. Cash flow statements reconcile the beginning and ending cash and cash equivalent account balances.

Cash flow usually refers to the ability of a business to collect and maintain enough cash to pay their forthcoming bills.

The cash flow statement format is normally separated into three sections: 1) operating activities, 2) investing activities and 3) financing activities:

1. Cash flows from operating activities include all activities that are on the income statement under expenses or operating income. They are calculated by adjusting the net income by the changes in the liability and current asset accounts.

2. Cash flows from investing activities demonstrate cash inflows and outflows from the sales and purchases of long-term assets. This is effectively the business investing in itself.

3. Cash flows from financing include cash transactions that have an impact on the long-term liabilities and equity accounts.

Basically, the cash flow statement converts net income into the change in the Cash account over that accounting period.

The components of a cash flow statement.

An important rule to remember is that if an asset account increases, this is subtracted from the cash flow statement but if a liability account increases then that is added to the cash flow statement. Asset accounts require the opposite action to an increase or decrease, whereas if liability accounts increase or decrease, they do the same on the cash flow statement.

Here is an example cash flow statement:

The statement of stockholders’ equity

The statement of stockholders’ equity is a financial statement that records the changes in equity from the beginning to the end of an accounting period. It shows the equity accounts that affect the equity balance: common stock, net income, paid in capital, and dividends.

First, the equity as it stands at the beginning of the period is reported, followed by any new investments from shareholders and the net income for the year. Next, all dividends and net losses are deducted from the equity balance, which provides the ending equity balance for the accounting period.

Revenues and expenses

Expenses and matching concept

The matching concept says that an expense should be recognized and recorded when that expense can be matched with the revenues which that expenses helped to generate. So, expenses aren’t necessarily recorded when they are paid out by the business, but expenses should be recorded as the revenues that relate to them are recorded.

Revenue recognition

This is the idea that revenue should be recognized and recorded when it is realized (or realizable) and when it is earned. Another way of putting it is a business shouldn’t wait until revenue is received to record it in their books. When the business has earned the revenue, the revenue should be recorded.

EXAMPLE 1 – Joe’s Jukeboxes, Ltd. sells a jukebox to a pub on 31 January for £3,000. But the jukebox was not paid for until 15 March and it was not delivered to the pub until 31 March. According to the revenue recognition principle, Joe’s would not record the sale in January. Even though the sale was realizable (in that the sale for £3,000 was initiated) it was not earned until March when the jukebox was delivered.

EXAMPLE 2 – Felix’s Funky Clothes, Ltd. sells clothing from its retail shops. A customer purchases a T-shirt on 12 May and pays for it on a credit card. Felix’s processes the credit card but does not receive any actual cash until June. Credit card purchases are treated the same as cash (this kind of purchase is called a ‘claim to cash’) so this revenue should be recorded in May when it was realized and earned.

THE GOING CONCERN CONCEPT

The going concern concept is the idea that we should assume that businesses will continue to exist. This means that we assume that the business isn’t going to declare bankruptcy or be dissolved (unless there is some evidence showing this). Therefore, when making financial statements, and spreading expenses or costs over multiple years, we should presume that there will always be another accounting period in the future.

Accounts receivable and bad debt expenses

Accounts receivable is the amount of money that people or companies currently owe to a business for any goods or services that were bought on credit. Accounts receivable has a debit balance because it is an asset account.

Accounts receivable are normally expected to be converted into cash within a year, so they are recorded in the current assets portion of the balance sheet at the end of each accounting period.

Often, accounts receivable are reported along with an allowance for doubtful accounts. The allowance for doubtful accounts has a negative balance and this decreases the outstanding accounts receivable balance. This is a contra asset because it reduces the balance in accounts receivable.

Whereas accounts receivable is an asset (money owed to the