THIS WEEK’S ISSUE AT A GLANCE

This issue’s finance Gems 💎 vote your favorite at the end of the newsletter.

• 20 Rates you Should Know

• The Accounting vs. Finance Cheat Sheet

• Budgets vs. Forecasts vs. Projections

• Analyze Financial Performance

1. The Finance Gem has gone bi-weekly

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Thousands of you reached out and answered polls over the past few months to suggest the length and frequency of the newsletter could be revised. I’m starting by reducing the frequency from 4x monthly to 2x monthly. Stay tuned for more updates.

As of this issue, you will find more custom content and practical examples included in every post to help you both understand and apply concepts better.

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THIS WEEK’S FINANCE GEMS

1. 20 Rates you Should Know

Because without understanding Finance you will struggle as a leader.

🎯Reply to this newsletter and me know which ones I should do a full tutorial on!

Interest Rate: The cost of borrowing money or the return on invested funds, involving prime rates, SOFR, and treasury rates.

Formula: Interest Rate = (Total Interest Paid / Principal Loan Amount) × 100

Exchange Rate: The value of one currency in terms of another, crucial for international business operations.

Formula: Exchange Rate = Domestic Currency / Foreign Currency

Inflation Rate: Measures the rate at which the general level of prices for goods and services is rising (CPI = Consumer Price Index).

Formula: Inflation Rate = ((CPI_current - CPI_previous) / CPI_previous) × 100

Discount Rate: Used in discounted cash flow (DCF) analysis to present value future cash flows.

Formula: Present Value = Future Cash Flow / (1 + Discount Rate)^n

Capitalization Rate (Cap Rate): Common in real estate, representing the rate of return on a property investment.

Formula: Cap Rate = Net Operating Income / Property Value

Internal Rate of Return (IRR): The rate at which a project or investment breaks even, used in capital budgeting. Formula: NPV = Σ (Cash Flow_t / (1 + IRR)^t) = 0

Annual Percentage Rate (APR): Reflects the annual cost of borrowing money, including fees and interest.

Formula: APR = ((Interest + Fees) / Loan Amount) × (365 / Loan Term) × 100

Effective Annual Rate (EAR): The actual annual return on an investment or cost of a loan, considering compounding.

Formula: EAR = (1 + APR/n)^n - 1

Dividend Yield: A financial ratio showing how much a company pays out in dividends relative to its stock price.

Formula: Dividend Yield = Dividends per Share / Price per Share

Risk-Free Rate: Theoretical return on investment with no risk, often represented by government bonds.

Formula: Risk-Free Rate = Yield on Government Securities

Hurdle Rate: The minimum rate of return required on an investment for it to be considered acceptable.

Formula: Hurdle Rate = Minimum Acceptable Return

Tax Rate: The percentage of Net Income paid to the government in the form of income tax.

Formula: Tax Rate = Tax Payable / Taxable Income

Return on Investment (ROI): Measures the gain or loss generated on an investment relative to the amount of money invested.

Formula: ROI = (Net Profit / Cost of Investment) × 100

Return on Equity/Assets (ROE/ROA): Indicates the profitability of a company in generating profits from its shareholders' equity or from its total assets.

Formulas: ROE = Net Income / Shareholders' Equity, ROA = Net Income / Total Assets

Depreciation Rate: The percentage rate at which an asset's value decreases over time.

Formula: Depreciation Rate = Annual Depreciation / Cost of Asset

Weighted Average Cost of Capital (WACC): Represents a firm's blended cost of capital across all sources, including debt and equity.

Formula: WACC = (E/V) × Re + (D/V) × Rd × (1-Tc)

Growth Rate: Used to measure the increase in a company's revenue or earnings, crucial for future projections and valuations.

Formula: Growth Rate = ((Value_end - Value_start) / Value_start) × 100

Lease Rate: In equipment finance or real estate, this rate determines the periodic payment amount for the use of an asset.

Formula: Lease Rate = Total Lease Payments / Lease Period

Coupon Rate: The interest rate paid by bond issuers on the bond's face value.

Formula: Coupon Rate = Annual Coupon Payment / Face Value

Yield to Maturity (YTM): The total return anticipated on a bond if held until it matures.

Formula: YTM = Approximate Interest Rate that Equates Present Value of Cash Flows to Bond Price

A WORD FROM THIS WEEK’S SPONSOR

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2. Accounting vs. Finance Cheat Sheet

Here's what you need to know:

Accounting and Finance and not the same.

They define value differently.
They have different objectives
They have different perspectives
They require different technical skills.

💡 Knowing how they differ will help you appreciate how each of them ads value.

💡 Knowing how they work together will help advance your career.

▷▷▷ 𝐇𝐞𝐫𝐞 𝐢𝐬 𝐰𝐡𝐚𝐭 𝐭𝐡𝐞 𝐅𝐢𝐧𝐚𝐧𝐜𝐞 𝐯𝐬. 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐢𝐧𝐠 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞𝐭 𝐢𝐧𝐜𝐥𝐮𝐝𝐞𝐬:

🎯 Accounting vs. Finance Differences across Scope, Focus, Timeframe, Regulatory environment and Tools of their trade

🎯 Accounting vs. Finance Designations to learn what they mean and what to pursue

🎯 Accounting vs. Finance Careers to learn about their work

🎯 Accounting vs. Finance in the CFO Office

🎯 Accounting vs. Finance KPIs to help you learn what to monitor

🎯 The Accounting Budget Flow to help you learn how budgets are built

🎯 20 Confusing Accounting Topics to help you differentiate between them

🎯 10 Essential Finance Skills for Managers to help prioritize what to learn

🎯 The Financial Analysis Scorecard to help structure your financial analysis

🎯 5 Key EBITDA Ratios to help you make better use of EBITDA

Download a complimentary full resolution pdf here.

3. Budgets vs. Forecasts vs. Projections

Budgets vs. Forecasts vs. Projections

They’re not the same. And you probably need them all.

Here’s what you need to know:

🎯 The Budget:

- Aligns spending plans with revenue generation and strategic objectives.
- Sets the baseline for performance metrics.
- Serves as a control mechanism for effective cost management.

🎯 The Forecast:

- Acts as a navigational tool for short/mid-term financial performance.
- Integrates real-time market feedback for dynamic strategy adjustments.
- Identifies early warning signs and opportunities for proactive measures.

»»»» The Rolling forecast

- Extends the forecast to provide a 12-month forward-looking perspective.
- Is dynamic, recalibrating predictions as new data and trends emerge
- Facilitates a more agile response to market changes, competitor actions.

🎯 The Projections:

- Encourage long-range thinking and future scenario planning.
- Inform stakeholders of potential growth trajectories and risks.
- Drive policy and strategic decisions at the highest organizational levels.

4. Analyze Financial Performance

Do you want learn how to tell the story behind the numbers?

Then learn to analyze financial performance.

Understanding financial performance is essential not just CEOs and CFOs

But also for most other internal and external stakeholders.

Here's how it benefits everyone in business.

🎯Business Owners & Entrepreneurs:

- Gauge business health and sustainability.

- Inform decisions on investments and strategic direction.

🎯CEOs:

- Gain insight into operational efficiency and market position.

- Shape the company's strategic vision and shareholder value.

🎯CFOs:

- Make sense of the past, design the financial strategy for the future

- Diagnose financial health and identify value-adding opportunities.

🎯Executives:

- Assess the impact of department strategies on financial goals.

- Align department initiatives with the company’s financial objectives.

🎯Employees:

- Understand job security and company’s growth potential.

- Inform and support alignment with the company’s success and objectives.

🎯Investors & Shareholders:

- Base investment decisions on company's earning potential and risk.

- Monitor financial health for portfolio management.

🎯Creditors & Lenders:

- Evaluate credit risk and likelihood of repayment.

- Manage lending risks through informed decision-making.

🎯Suppliers & Vendors:

- Determine credit terms and trade negotiations based on company stability.

- Assess financial reliability for long-term partnerships.

🎯Customers:

- Ensure reliability and longevity of supply relationships.

- Secure supply chain stability.

🎯Consultants & Advisors:

- Offer tailored, value-driven advice based on financial insights.

- Identify areas for process and strategic improvements.

To learn more, check out my exclusive 16-in-1 financial model in my online shop and learn how to integrate dynamically all 3 financial statements, calculate and analyze financial performance, calculate break-even, the weighted average cost of capital, DCF analysis for valuations and many other essential concepts.

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