THIS WEEK’S ISSUE AT A GLANCE

This issue’s finance Gems 💎 vote your favorite in the poll section

• 10 Financial Analysis Tools

• The CFO Role Checklist

• 100 Questions for the CEO

• Leadership vs. Management

1. The Finance Gem is going bi-weekly

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.

2. My new course is now live: The Financial Analysis Masterclass sale is on. Save an additional 30% off the launch price. Details below.

3. I’m speaking once again at the largest finance conference in the world! AFP2024 takes place in Nashville in October - reply to this email to let me know if you’re attending!

   

   If you had a magic wand, what would you change about The Finance Gem💎?

   The length, it's too long and I don't have time to read it all The frequency, it's too and I can't read it every week The depth, it's not exploring topics in more detail The breadth, it's not covering broad topics The applicability, it's not giving me enough practical examples

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THIS WEEK’S FINANCE GEMS

1. 10 Financial Analysis Tools

If you want higher profits, margins, returns, cash flows…

Then make sure you start with Financial Analysis.

I’ve been doing this successfully for 15 years.

Here’s my 3 step approach to drive results:

1. Understand the company’s Past

2. Monitor their Present

3. Project the Future.

Here are 10 Tools

To get started

1️⃣ Liquidity Ratios

🎯 Calculate the current ratio (Current Assets/Current Liabilities) to assess a company's ability to pay short-term obligations

🎯 Determine the quick ratio ((Current Assets - Inventory)/Current Liabilities) to evaluate how well a company can pay its short-term liabilities without relying on inventory

🎯 Analyze the cash ratio (Cash + Cash Equivalents/Current Liabilities) to understand the firm's capacity to pay off short-term debt using only cash

🎯 Calculate the operating cash flow ratio (Operating Cash Flow/Current Liabilities) as a cash flow driven vs a current asset driven liquidity ratio

2️⃣ Solvency Ratios

🎯 Compute the debt-to-equity ratio (total debt/total equity) to gauge a company's financial leverage and reliance on external financing

🎯 Evaluate the annual debt coverage ratio ((EBITDA or Operating Cash Flow)/(principal + interest)) to determine if the company can pay its debt obligations

🎯 Calculate the interest coverage ratio ((EBIT or EBITDA)/interest expenses) to see how easily a company can service the interest payment obligations on its outstanding debt.

🎯 Calculate the mixed leverage ratio (Funded Debt/EBITDA) to analyze the how many years it would take the company to repay its outstanding debt balance

3️⃣ Profitability Ratios

🎯 Determine the gross profit margin (Gross Profit/Revenue) to assess a company's ability to generate profit from its core operations

🎯 Calculate the operating profit margin (Operating Profit/Revenue) to evaluate a company's efficiency in generating profit

🎯 Analyze the net profit margin (Net Profit/Revenue) to gauge a company's overall profitability

🎯 Calculate the ROIC (Return on Invested Capital), ROE (Return on Equity) and/or ROCE (Return on Capital Employed) as additional profitability metrics which consider the resources required by the company to generate its profits

4️⃣ Efficiency Ratios

🎯 Assess the inventory turnover ratio (Cost of Goods Sold/Inventory) to measure how efficiently a company manages its inventory

🎯 Evaluate the accounts receivable turnover ratio (Net Credit Sales/Average Accounts Receivable) to analyze how effectively a company collects payments from customers

🎯 Analyze the accounts payable turnover ratio (Purchases/Average Accounts Payable) to analyze effectively a company pays its suppliers

🎯 Calculate the asset turnover ratio (Net Sales/Average Total Assets) to measure how well a company uses its assets to generate revenue

5️⃣ Valuation Ratios

🎯 Compute the price-to-earnings ratio (Stock Price/Earnings per Share) to determine the market's valuation of a company's earnings potential

🎯 Analyze the price-to-sales ratio (Stock Price/Revenue per Share) to measure the market's valuation of a company's revenue

🎯 Calculate the price-to-book ratio (Stock Price/Book Value per Share) to evaluate the market's valuation of a company's net asset value

🎯 Consider calculating the Enterprise Value to EBITDA ratio (Enterprise Value/EBITDA) for a more comprehensive measure of a company's valuation by taking into account debt and cash

6️⃣ Market Ratios

🎯 Determine the dividend payout ratio (Dividends per Share/Earnings per Share) to evaluate the proportion of earnings distributed to shareholders as dividends

🎯 Calculate the dividend yield (Annual Dividend per Share/Stock Price) to measure the return on investment for shareholders based on dividends

🎯 Analyze the dividend coverage ratio (Earnings per Share/Dividends per Share) to assess a company's ability to maintain its dividend payments

7️⃣ Trend Analysis

🎯 Track a company’s historical ratios by year in a spreadsheet and notice the horizontal trends

🎯 Calculate the company’s projected ratios by year based on its forecast, and notice how they trend compared to historical ratios

🎯 Analyze the company’s overall ratios trends, determine how they each stack against industry or or otherwise healthy benchmarks, and consider if the company’s projected results need changing to align with objectives

8️⃣ Cash Flow Analysis

🎯 Review the company's historical cash flow statements year-by-year to assess trends in operational, investing, and financing activities.

🎯 Project future cash flows based on the company's current operational strategies, investment plans, and financing arrangements, and compare these projections to past trends.

🎯 Evaluate the sustainability and health of cash flows by comparing them to industry norms and financial stability benchmarks, and decide if strategic adjustments are necessary to improve cash management and meet financial goals.

9️⃣ Sensitivity Analysis

🎯 Conduct a sensitivity analysis by creating scenarios (optimistic, pessimistic, most likely) for the company's financial forecast to gain insights into the potential impact of changes in key variables (sales growth rate, margin, etc.) on the company's financial health

🔟 Contextual Analysis

🎯 Assess the quality of earnings, looking at non-recurring items, the reasonableness of estimates and assumptions, off-balance sheet items, and related party transactions

🎯 Review the notes to the financial statements, the auditor's report, and the management's discussion and analysis (MD&A) to gain essential qualitative insights and context that can enhance your understanding of the numbers presented in the financial statements

🎯 Analyze industry trends, market conditions, and economic indicators that influence the company’s performance to understand competitive dynamics, regulatory changes, and technological advancements that impact the business landscape and its financial outcomes.

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2. The CFO Role Checklist

CFO at a Startup vs. CFO at a Mature Co.

Which one is for you?

🎯 Take the test and Comment Startup or Mature below!

Depending on the company’s stage, the CFO role may look different

From a Startup to a Mature Company.

Your impact on Compliance Systems.

Your Tools and Systems at disposal.

Your Alignment with the CEO.

Your access to Resources.

Your Team Building role.

Your Scope of Influence.

Will not be the same.

Here are 10 areas compared, to help you choose better

What works for you, your skills and your career.

Do you like to assemble and define, or develop and restructure?

Do you aim to select and implement, or maintain and upgrade?

Do you prefer to overhaul and create, or refine and streamline?

Do you want to build and innovate, or manage and optimize?

Do you wish to align and shape, or support and execute?

The CFOs choosing a startup,

Have a lot of headwinds to navigate.

Scalable and efficient financial tools are crucial.

Robust controls for CFOs as they scale are a must

And so is a financial platform like Mercury that can grow with the business.

Mercury is the fintech ambitious companies use for banking* and all their financial workflows.

Over 200K startups choose Mercury to confidently run all their financial operations

With a powerful bank account at the center of their operations, companies can

↳ make better financial decisions

↳ ensure that every dollar spent aligns with company priorities.

*Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust®; Members FDIC

DEAL ALERT

Poor Financial Analysis has Dramatic Consequences...

• If you don't analyze historical financial results thoroughly... you may miss critical warning signs.

• If you lack strategic understanding of the company's SWOT... critical opportunities and threats may slip by unnoticed.

• If you fail to integrate strategic objectives into forecasts... your plans might not align with your company's goals.

This can leave your company vulnerable to financial distress and even bankruptcy.

Learn to avoid these dramatic consequences.

Earn your stripes with adept Financial Analysis.

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3. 100 Questions for the CEO

100 Questions for the CEO

A CEO's success is determined by the questions they can answer.

⏬⏬⏬

Want high ROI and pleased shareholders?

Industry accolades for governance and ethics?

A highly engaged, diverse, and committed workforce?

Consistent revenue growth that outpaces competitors?

Reduced operational costs due to optimized processes?

Enhanced brand reputation leveraging strategic alliances?

Effective strategies for mitigating risk and handling crises?

Strong customer loyalty and market leadership in key areas?

A technology framework that's safe and empowers innovation?

Positive and lasting impact on the environment and community?

Then you need to be able to answer these critical 100 questions.

𝐇𝐞𝐥𝐩 𝐦𝐞 𝐬𝐩𝐫𝐞𝐚𝐝 𝐭𝐡𝐢𝐬 𝐞𝐬𝐬𝐞𝐧𝐭𝐢𝐚𝐥 𝐤𝐧𝐨𝐰𝐥𝐞𝐝𝐠𝐞.

🎯𝐋𝐢𝐤𝐞, 𝐒𝐡𝐚𝐫𝐞 𝐚𝐧𝐝 𝐂𝐨𝐦𝐦𝐞𝐧𝐭 𝐬𝐨 𝐭𝐡𝐢𝐬 𝐩𝐨𝐬𝐭 𝐜𝐚𝐧 𝐫𝐞𝐚𝐜𝐡 𝐞𝐯𝐞𝐫𝐲𝐨𝐧𝐞 𝐰𝐡𝐨 𝐧𝐞𝐞𝐝𝐬 it!

---

Here are some of the most vital 100 questions every CEO should be able to answer.

☑️ Leadership and Strategy

- What differentiates us from our competitors?

- How are we cultivating a culture of innovation?

- Are we leveraging our industry network effectively?

☑️ Financial and Operational Excellence

- Are we maximizing profit margins without compromising quality?

- How are we preparing for unforeseen crises?

- Are our sustainability efforts driving business value?

☑️ People Management and Culture

- How are we making ourselves an employer of choice?

- Are employees comfortable reporting unethical behavior?

- Are we proactive or reactive in our media relations?

☑️ Market and Customer Focus

- Are we achieving a positive ROI on our marketing spend?

- How are we turning dissatisfied customers into advocates?

- Are we agile enough to pivot our product roadmap?

☑️ Technology and Global Considerations

- How are we defending against the most likely cybersecurity threats?

- Do we have localized marketing strategies for international markets?

- Are we ensuring business continuity in times of internal crisis?

Download a full resolution here.

4. Leadership vs. Management

   Leadership is not Management.

   They’re not the same.

   Yes, they both aim to move organizations towards their goals

   But no, their core philosophies aren’t the same.

   Leadership is about Influence.

   Management is about Execution.

   --------

   ➡️ Here’s how they are different and how to transition from one to the other.

   🎯Leadership is the art of motivating a group of people to act towards achieving a common vision.

   🎯Leadership sets the horizon, lights up a path, and inspires growth, change, and innovation.

   🎯Leadership designs the culture, catalyzes the vision, and it embodies the values and behaviors they seek to instill across the organization.

   Meanwhile:

   🎯Management is the science of systematically running an organization.

   🎯Management involves detailed planning, efficient organization, and effective goal execution.

   🎯Management maintains order, minimizes risks, and maximizes outputs with the resources at hand.

   ➡️ How to become a better Manager:

   Improve Your Operational Skills: Leadership often focuses on strategic thinking, while management requires a good working knowledge of the nuts and bolts of day-to-day operations.

   ➡️Sharpen your project management and process optimization skills.

   Develop Tactical Thinking: Whereas leaders may focus on setting the vision, as a manager, your role is to create and execute detailed plans to achieve this vision.

   ➡️Get comfortable with making short-term goals that align with the long-term strategy.

   Prioritize Time Management: Effective managers are masters of time.

   ➡️Brush up on your ability to manage schedules, deadlines, and priorities without sacrificing quality.

   Strengthen Analytical Abilities: Management relies heavily on data and metrics.

   ➡️Cultivate a data-driven mindset that can identify trends, understand performance metrics, and make informed decisions.

   Learn to Delegate Effectively: While leaders inspire, managers must ensure tasks are completed.

   ➡️Learn the art of delegation: assigning the right tasks to the right people and following up effectively.

   ➡️ How to become a better Leader:

   Cultivate Emotional Intelligence: As a leader, your ability to connect, understand, and motivate others is paramount.

   ➡️Develop empathy, self-awareness, and social skills to influence and inspire your team.

   Think Strategically: Shift your focus from the day-to-day to the broader horizon.

   ➡️Learn to spot trends, identify opportunities for innovation, and think several steps ahead.

   Embrace Risk: Leaders are often at the forefront of change, which involves risk.

   ➡️Get comfortable with uncertainty and making decisions that may not pay off immediately but have the potential for significant impact.

   Invest in People: Look beyond immediate skill sets and cultivate potential.

   ➡️Leadership involves mentoring and developing future leaders by providing opportunities for growth and learning.

   Communicate Vision: Develop the ability to articulate a compelling future that resonates with others.

   ➡️Your communication should not just direct but also engage and get your team excited about the possibilities ahead.

POLL TIME

As always, if you have specific suggestions or feedback, or topic suggestions, simply reply to this email.

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