Course details
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Aims
This course aims to:
- raise your financial awareness, confidence and skills
- enable you to engage more successfully with finance specialists by asking them more and better questions, more assertively; and
- support you if you are considering a career, secondment or further studies in finance
Course content
This course is a straightforward and highly interactive introduction to financial understanding. No prior knowledge is required or assumed. The course will be particularly beneficial if you are studying finance or accounting – or considering doing so – and want an introduction or refresher on fundamental concepts.
It will also benefit you if you are self-employed, considering self-employment, considering a career or internship in finance, need to liaise with financial colleagues or advisors, or just interested in finance and want to learn more. The course will cover: money and capital; cash flows and cash flow forecasting; financial reporting; interest and return; and risk and risk management.
All organisations and individuals need money - and usually capital funding - to continue their business operations or other activities. Funding providers may be willing to invest, or lend, the necessary capital. But funding providers need assurance about the security of their investments, expected rates of return, and the organisation’s risk management.
Cash management and flow forecasting are fundamentally important risk management tasks in any organisation. Even if we’re not directly responsible for these activities, we need to engage and communicate with our colleagues who are. Financial reporting is the outward facing summary, in conventional formats, of our organisation’s effective and sustainable financial management
What to expect on this course
Each session will include an introductory lecture, your questions, interactive discussions and interactive examples incorporating financial numbers. Please bring something to write with and on, a calculator, and a willingness to join in group discussions.
If you are not ready to join in group discussions, then the teaching methods in this course are unlikely to suit your preferred learning style, and we recommend you do not apply for this course or consider transferring to another course.
Questions for you –
Why have you enrolled on this course?
Improve future career skills?
Improve current work skills?
Route to advanced finance studies?
Improve personal financial management?
Academic interest?
Something else?
Personal motivations - recap - evolution
Restating your personal motivations for being here is enormously helpful for you and also for me:
- For you, it supports you to focus on what you're seeking from our time together, and ask me focused questions and highlight topics accordingly.
- It also helps me to ensure - so far as practicable - that I've addressed all the key topics and perspectives you want to explore on the course.
I hope you have an opportunity to reflect on your motivations, during our time together. Do feel free to write about them as often as you wish. Sharing evolving thinking can accelerate and improve the focus of its evolution.
Course sessions
Session 1 - Money and capital
Money includes banknotes, coins, bank balances and certain other assets. Money is defined as a short-term store of value. It generally takes the form of a promise to pay the owner of the money on demand – expressly stated or implied. While paper money used to be backed by silver or gold, modern money has no inherent value. Its value derives instead from the trust and the confidence the users of the money have towards the issuer of the promise to pay – usually a central government.
Financial capital is a longer-term store of value, usually in the form of a promise to pay later. Financial capital may be backed by other assets, but not always. Whether or not the financial capital is backed by other assets, trust toward its issuer is a fundamentally important component of its value. High levels of well-founded confidence are essential in a modern economy.
Some issues to consider: What different kinds of money can you think of? What different kinds of capital can you think of? Are there any sorts of things, that you're not sure whether or not they count as money or capital? What are they?
Now considering your personal situation: What money and capital resources do you currently have available to you? Are you seeking improvements for the future? How might you achieve improvements?
Consider a company you know, and perhaps admire: What money and capital resources does it currently have available to it, as far as you know? Is the company seeking improvements for the future? How might the company achieve improvements?
Sessions 2 - Cash flows and cash flow forecasting
Cash is an enormously important asset for most organisations and individuals, most of the time. The less cash we have, the more important it becomes. If we run out of short term cash to pay our liabilities we can go bankrupt, even if we still have value tied up in our longer term assets.
Cash flows are the changes in our reserves of cash. Cash flow forecasting is making projections of our cash flows and cash reserves, and taking timely action to cover potential shortfalls. Related cash flow statements are a key building block of financial reporting.
Some issues to consider: What do you think might be some of the benefits of competent cash flow management for an individual or a household? What do you think might be some of the benefits of competent cash flow management for a larger commercial organisation
Session 3 - Financial reporting
External financial reports are accounts – also known as financial statements – prepared by the managers of organisations to answer the legitimate questions of different stakeholders in the organisation’s activities. Stakeholders in companies include its owners (shareholders) who want to know, “What have you managers been doing with our money and our other assets?” Other stakeholders include tax authorities, who want to know how much tax our company owes them.
External financial statements are produced in standard formats, including cash flow statements, balance sheets, income statements and other information. Internal financial reports will – ideally – include all the other information the managers need to run the business from day to day, as well as strategically.
Some issues to consider: What are some of the benefits or uses of accounts? What are some of the problems with accounts? How many primary financial statements are there? Can you name any of them? Which statement do you think is the most important one to look at first?
Session 4 - Interest and return
Investors in financial capital include depositors in banks, lenders, and shareholders. In all cases the investor wants their original invested capital to be safe. They also expect a surplus on top of the amount they originally invested. This surplus is known as a return, often expressed as an annual percentage rate of return, to enable comparisons between different capital assets.
Interest is one form of return, generally calculated as a percentage of the amount originally deposited, loaned or borrowed – or sometimes on an accumulating balance rolling up over time, or on a reducing balance being paid off over time. Interest is a form of income. Total returns may include capital gains as well as income. Returns can be negative, as well as positive.
Some issues to consider: What is a share? In what form do investors in shares expect to enjoy financial returns? What is a corporate bond? In what form do investors in corporate bonds expect to enjoy financial returns? What is the yield on a bond? What is the difference between interest income and total investor return?
Session 5 - Risk and risk management
For investors in organisations, key risks they are concerned about include: losses in the capital value of their invested money, and reductions in the returns that they expected when they made their investments. Managers have fiduciary and stewardship responsibilities for the owners’ assets that they are managing on their behalf.
This includes responsibilities for identifying, responding to, and reporting on the significant risks to which the organisation is exposed. Managers also have responsibilities to wider - and longer term - stakeholder interests.
Some issues to consider: What kinds of risks with financial consequences is it good for individuals to give significant risk management attention to? Can you give an example for yourself? What kinds of risks with financial consequences is it good for organisations to give significant risk management attention to? Can you give an example? Being recklessly prudent means being excessively risk-averse. Have you experienced or observed this?
Session 6 - Valuing businesses and valuation multiples
Values and valuations are fundamentally important, but not always straightforward to quantify. Appropriate valuation techniques, and the values themselves, can depend on the circumstances, as well as the nature of the asset.
When a company’s shares are listed on an exchange, the latest traded price per share is quoted continuously during trading hours. The total current market price of all the shares is simply the price per share multiplied by the number of shares. This total figure is sometimes known as the market capitalisation, to emphasise the perspective that the prevailing market price of the shares might represent an overvaluation - or an undervaluation - by the market.
Multiples valuation means comparing values, or estimating values, based on a multiple of a relevant financial measure. Examples include price to earnings ratios for a company’s equity, and EBITDA (earnings before interest, tax, depreciation and amortisation) multiples for the whole enterprise, the total of the company’s share value and its debt.
Some issues to consider: True or False: When a company's shares are listed and traded on an exchange, market supply and demand ensure the prevailing share price is an accurate reflection of the true value of the business? Do you think it might be possible to make an estimate of today's value of your future earning power, either in employment or in some other productive activity? How might you go about making that estimation? Can you explain what is meant by multiples valuation, applied to a business? Can you give an example?
Session 7 - Valuation and discounted cash flow
Cash flow is an enormously important measure for most organisations and individuals, most of the time. But so is the timing of our cash flows. $1m receivable tomorrow is better than $1m receivable in 10 years’ time. If we get $1m tomorrow, we might be able to use it a number of different useful ways. For example, we might be able to repay some borrowings earlier and save interest expense. Or we might be able to deploy the $1m into another attractive investment opportunity.
On the other hand, if we have to wait another 10 years to get our $1m, we won’t have any of those attractive options open to us. So, we’d clearly prefer to collect our money earlier, assuming no difference in the amounts. This preference reflects the time value of money. But what if we had to choose between getting a smaller amount of $0.8m tomorrow, or the full $1m in 10 years’ time?
Tools for making this evaluation include Future value, Present value, and Net present value. These project evaluation tools are all Discounted Cash Flow (DCF) techniques, giving results in today’s money terms. They factor in the timing and risk of forecast cash flows, as well as their amounts. One valuation method for a business or company is a DCF analysis of the entire enterprise.
Some issues to consider: Assume you are economically rational. Interest rates are 8% per year throughout. Would you prefer $1m now, or $1m in a year? Why? Would you prefer $1m now, or $2m in a year? Why? We can buy a bond that will pay out $108m in a year. What is the bond worth today?
Session 8 - Market and book values
Market values imply a sale and purchase transaction, or a potential sale and purchase transaction, in the market. Book values, in this context, mean amounts reported in a company’s financial statements. Book values and market values can differ substantially, with market values of successful companies often greatly exceeding their book values.
Reasons for the differences include most goodwill, and many other valuable intangible corporate assets, that are not recorded in traditional financial statements. Book values for large organisations are audited, adding to the credibility of the reported book values.
Some issues to consider: True or False? Book values are based on a company’s income statement? True or False? Book values are based on a company's cash flow statement? Can you explain the difference, if any, between equity value & entity value? Can you explain the difference, if any, between entity value & enterprise value?
Session 9 - Debt capital markets and loan markets
Borrowings and loans are liabilities for the borrower, and investment assets for the lender-investor. Creditworthy organisations can borrow money by issuing bonds. The bond is a promise by the issuer to repay the amount borrowed, plus interest, over a designated period of time. Issuers of bonds include a wide range of corporate and public sector entities, including central governments. Debt capital markets are the markets where bonds are traded.
The prices of bonds are inversely related to their current market yields. The yield is driven, in turn, by a number of factors including general market interest rates and perceptions of the credit risk of the issuer. Credit rating agencies issue opinions on the credit risk of particular issues of bonds, as well as the general credit strength of certain issuers.
Loan markets relate to lending and borrowing documented in a loan agreement between a borrower and a lender, or a syndicate of lenders. Lenders include banks and other financial services organisations. Interest and capital repayments of loans and bonds are a legal contractual commitment of the borrower. Failure by the borrower to meet its obligations will generally be an event of default, giving additional enforcement rights to the lender. These lenders’ rights are a source of risk for borrowers, and a reason why adding debt to a financing structure increases risk for the borrower, at worst potentially leading to corporate failure for the over-borrowed company.
Some issues to consider: Is debt an asset, a liability, or both? Is debt a form of capital? Can you explain the difference, if any, between a capital market bond and a loan? Can you explain the relationship, if any, between the $ price of a fixed rate bond & the % yield to maturity on the same bond?
Session 10 - Equity capital markets and private equity
The simplest, and most common, form of equity is ordinary shares, also known as common stock. Ordinary shares are a proportionate ownership interest in a company. Dividends on ordinary shares are a discretionary payment by the company, out of its profits (if any). This is key difference between equity capital and debt capital, debt servicing payments being contractual obligations. Shares and bonds are known collectively as securities. Other forms of security include intermediate ‘hybrid’ securities, which have some features of equity, and some features of debt instruments.
Equity is generally safer for the issuer compared with debt, but more expensive. Part of the cost of equity capital is the expectation, or requirement, of the equity investors for the company to grow its capital value. Equity capital markets are the markets where equity is issued and traded. Public companies, also known as listed companies, are those whose shares are quoted on a stock exchange, and which members of the public can invest in, generally through a broker.
Private equity deals with companies whose shares are not listed on an exchange. Flotation, or an initial public offering, results in shares becoming listed on an exchange. Privatisation, or taking private, is the opposite process. Private companies have relatively fewer reporting obligations, but more limited access to new capital. Here as elsewhere, there is a trade off - and a strategic decision to make - to balance flexibility and cost. The balance point is likely to change over the life cycle of the business.
Some issues to consider: As a form of capital funding, is equity generally safer than debt for the company being funded? Can you say why? As an investment, is equity generally safer than debt for the investor? Can you say why? What do you understand by Total Shareholder Returns? Why do you think some companies use total shareholder returns as a measure to assess senior management on? Can you think of any disadvantages to using total shareholder returns to evaluate and reward senior management on?
Learning outcomes
As a result of the course, you will gain a greater understanding of the subject and you should be able to:
- improve your personal financial situation by applying insights from the course
- determine whether further studies, a secondment or career in finance might be appropriate for you
- improve your eligibility for admission to related academic institutions, secondment programmes or employment
Required reading
There are no required readings for this course.
Please review the questions under What to expect (above), and Course sessions (also above), and be willing to respond to some of them on the learning website (Virtual Learning Environment – VLE) and in person in class.
If you are not ready to join in group discussions, then the teaching methods in this course are unlikely to suit your preferred learning style, and we recommend you do not apply for this course, or consider transferring to another course.