MS in Organization Management and Strategy
Understanding and Managing Money Flows

Overview

Course code: SHBI-GB 7324 B30

This core course will explain the financial language used in businesses and discuss the pros and cons of financial metrics used to evaluate the feasibility and success of businesses. The course will use real cases to explain how business strategy and its execution are reflected in financial statements. It will also teach you how to build business budgets and plans.

Help and Office

• Me: dgode@stern.nyu.edu, 212-998-0021, Office: KMC 10-86.

Materials

• There is no book that I am aware of that covers the topics from the mindset of this course. Therefore, I will provide my materials.

Attendance and penalty for missing classes

Requiring attendance is necessary for several reasons. First, you incorrectly assume you can catch up on a missed class by watching a recording (if available). Videos do not engage your brain as much as a live class. Second, less than 20% of you watch the recording (if available). You are then lost in class, which provides wrong signals to me as an instructor. Third, your absence hurts class discussions. Fourth, you miss out on feedback if you do not work through the questions I pose in class. Fifth, I lose the feedback since there are fewer questions.

The policy below will be in effect only after the add/drop period.

Without mandatory attendance, attendance is often below 50%. Therefore, though I dislike doing this, I penalize absences. If you anticipate being absent for good reasons, please email me well in advance. Please enter "Excused" on the attendance sheet described below to avoid the penalty if I approve. If you miss a class due to emergencies and cannot tell me in advance, do not panic. Take care of the emergency first, and then email me. I will permit you to change the "Absent" to "Excused." But, if you miss a class without a valid reason, there is a penalty, as stated below.

For sections meeting in 150-190 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY missed session unless you were explicitly excused via email. Thus, if you miss two class sessions, you will lose two grades, and so on.

For sections meeting in 75-80 minute sessions, you will lose one grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY TWO missed sessions unless you were explicitly excused via email. Thus, if you miss four class sessions, you will lose two grades, and so on.

Please sit in the same seat in every class and display your name tags. For Zoom classes, you must keep your video on AT ALL TIMES. You must also have a good working headset or mic, as it is extremely rude to be inaudible and force me to ask you to repeat yourself. After entering the class, please mark yourself present in the first 20 minutes on the OneDrive sheet (link posted on Brightspace). You will be marked absent if you are more than 20 minutes late unless it is because of factors beyond your control (traffic, subway, interviews running late). You will also be marked absent if you leave the class early unless you have my permission or get it afterward. You will get an F in the course if you are caught cheating on the attendance sheet.

Grading

• Assignments: 25%
• Project: 35%
• Final exam: 40%

Schedule

The list of topics covered is provided below.

Session 1: Introduction to the financial statements

Financial reports

• The three major uses of financial reports: Tracking money flows, performance evaluation of managers, and capital allocation
• Tracking money flows: Why even an entrepreneur working alone needs financial statements?
• Performance evaluation of subordinates: Unobservable actions and moral hazard. What challenges arise a business grows and work needs to be delegated? What are the strengths and weaknesses of using financial reports for performance evaluation? What games can people play with financial numbers?
• Capital allocation: Unobservable attributes and adverse selection. How financial reports help investors measure return on capital. What challenges arise when a business has to raise money from others? Why are public audits necessary?

The financial reporting system

• Why is the double entry bookkeeping system indispensable?
• How do modern accounting systems work?
• What is the difference between public and private companies?
• How do public companies report to investors?
• How do all companies report to tax authorities?

Linkages between the financial statements: Stocks versus flows

• Balance sheet: Cumulative effects measured at a point in time
• Flow statements: Equity statement, income statement, and cash flow statement

Session 2: Cash flows versus wealth flows — Revenues versus receipts

Permanent differences: Financing receipts that are never revenues

• Receipts from shareholders: Wealth flows that are not wealth created
• Receipts from lenders: Cash flows that are never wealth flows

Temporary differences: Receipts that differ in timing from revenues

• Accruals: Receivables arising from revenues being accrued before cash is received
• Deferrals: Deferred revenues arising from revenues being deferred after cash is received

Session 3: Cash flows versus wealth flows — Expenses versus payments

Permanent differences: Financing payments that are never expenses

• Payments to shareholders: Wealth outflows that are not wealth consumed
• Payments to lenders: Cash outflows that are not wealth outflows

Permanent differences: Payments that differ in timing from expenses

• Accruals: Payables arising from expenses being accrued before cash is paid
• Deferrals: Prepayments arising from expenses being deferred after cash is paid
• Special cases of deferrals: Inventories; Property, plant, and equipment, Intangibles, and Goodwill

Session 4: Size and growth — Revenue and its drivers

Fashion and tech industry revenue metrics

• Software service and product based
  • Number of paying customers or subscribers
  • Average revenue per user
  • Customer retention rate
• Advertising based
  • Number of active users
  • Page views, time spent per visit, price per click, number of clicks
  • Number of advertisers
  • Average revenue per user
• Consulting based
  • Revenue per employee: Billable hours per employee, price per billable hour
  • Commission rate
• Product or location-based
  • Sales per square foot
  • “Same-store” growth: This definition can be modified to mean “same product growth”
  • Ramp up rate

Growth metrics

• Compounded annual growth rate, Year-over-year growth, Quarter-over-quarter growth
• Product life cycles: Diffusion and the S-curve
• Organic growth versus acquisitive growth
• Constant currency growth

Market share

• Network effects
• Switching costs
• Dominant brand positioning
• Experience effects
• Economies of scale
• Economies of scope

Modeling revenues

• Identifying key revenue drivers
• Forecasting key revenue drivers
• Tying forecasts of revenue drivers to a top-line revenue number

Session 5: Margins — Expense drivers

Cost behavior

• Fixed, semi-fixed, and variable costs; contribution margins
• Long-run versus short-run cost behavior
• Break-even analysis

Operating expense ratios and margins

• COGS/Sales and gross margin
• R&D/Sales; Marketing/Sales: When investments are booked as expenses
• SG&A/Sales
• EBITDA and EBIT margins

Revisiting interaction with size

• Experience effects
• Economies of scale
• Economies of scope

Modeling expenses

• Identifying key expense drivers
• Forecasting key expense drivers
• Tying expense forecasts to net operating profit after tax

Session 6: How prepayments require financing and payables mitigate the need for financing

Modeling prepayments: Operating assets

• Property, plant, and equipment: Capacity planning, PP&E turnover
• Inventories: Days of inventories
• Prepaid advertising, insurance, and rent: Days of prepayments

Modeling payables: Operating liabilities

• Suppliers: Days of payables
• Employees, warranties, other costs: Days of accrued expenses

Session 7: How receivables increase the need for financing and deferred revenues provide financing

Modeling receivables: Operating assets

• Receivables: Days of receivables
• Bad debts and allowances

Modeling deferred revenues: Operating liabilities

• Deferred revenues: Days of advance

Session 8: Meeting financing needs with debt and equity

Raising debt

• Assessing borrowing capacity: debt/EBIT ratio, EBIT/Interest expense ratio, debt/value ratio
• Understanding corporate loans using personal finance examples
  • Secured versus unsecured
  • Private versus public
  • Fixed versus floating
  • Long term versus short term
• Vendor financing and leasing

Raising equity

• Common shares
• Preferred shares
• Convertible preferred shares

Sweat equity and incentive structures

• Share-based compensation

Session 9: An integrated view — The Six Pack Framework

The six key value drivers

• Size
• Growth
• Margins
• Net operating asset intensity
• Business risk
• Financial risk

Size

• Economies of scale
• Economies of scope
• Network externalities
• Experience effects

Growth

• How diffusion rates affect growth
• Organic versus acquisitive growth
• Commonly used growth metrics
• Leading versus lagging indicators

Margins

• Pricing power
• Cost efficiencies
• Buying power and sourcing

Net operating asset intensity

• Operating versus financial assets
• operating versus financial liabilities
• Net operating assets and invested capital

Business risk

• Sources of risk
• Cyclical businesses

Financial risk

• Liquidity
• Leverage