Financial Acumen for Engineers

Financial acumen

• Easily make sense of balance sheets and income statements
• Understand essential financial concepts and terminology
• Understand the interrelationship of key financial variables and metrics
• Understand how managers can and do influence financial performance
• Gain an executive perspective on the financial drivers of a business

Organisational and interpersonal skills

• Consider your organisation’s financial goals and priorities
• Gain confidence in communicating with senior managers, executives and finance staff
• Learn how to ask pertinent questions about financial issues and performance
• Be better able to justify proposals and projects from a financial perspective
• Improved decision-making through consideration of multiple effects on financial performance

Session 1: The Financial Window of Business (Workshop)

This session uses a new business venture to introduce and explain the ‘financial window’, which is based on three fundamental financial equations. The model links three key financial statements and provides a coherent foundation for the entire course.

The financial window will be used to explain important financial concepts (and associated jargon), such as funding of assets, how profit is generated and where it is retained, the inflow and outflow of cash, how a business can go bust showing a profit, and two financial imperatives that apply to all businesses.

Session 2: Cash Flow Versus Profit (Self-paced)

This session begins with a few quick review exercises so you can check and reinforce your learning from session one. It then extends your knowledge by focusing on the concept of recognition to clarify the essence of accrual accounting and the real meaning of profit.

Two key principles of accrual basis accounting will be clarified: the revenue recognition principle and the matching principle. Also, specific concepts will be covered, such as expenses vs expenditure, cash vs non-cash transactions, accrued expenses and accrued revenues, and free funding of assets.

Session 3: Financial Window Thinking (Workshop)

We start with a brief reflection exercise. The expanded balance sheet will be explained, including the recording of three types of cash flow (operating, investing, financing) and the recording of revenue, cost of sales, and operating expenses.

‘Financial window thinking' is a valuable skill that involves using the financial window to quickly ‘decode’ and make financial sense of business plans, conversations, and activities. The skill is developed via the analysis of numerous 'micro-scenarios', which cover a wide range of financial events.

Session 4: Real Financial Statements (Self-paced)

This session begins with a few practice exercises to check and reinforce your learning from session three. It then significantly extends your knowledge of Balance Sheets and Income Statements by examining real-life financial statements from selected engineering companies.

You will learn about operational vs non-operational expenses, multiple levels of profit (e.g., EBITDA), the vertical balance sheet format, more balance sheet concepts/terminology, the meaning of ‘capital' and ‘funds employed', and questions to guide your initial reading of the financial statements.

Session 5: The Big Picture of Profitability (Workshop)

We start with a brief reflection exercise and then consider two basic strategies for increasing profit. You will then be introduced to the three fundamental levers of the Profit Creation Cycle. These are expressed in the form of the DuPont equation, which was developed by an engineer.

You will learn three high-level metrics for managing profit creation, the inherent role of financial leverage, the effect of asset utilisation, and the interpretation of return on equity (ROE). The profit creation cycle will be applied to two engineering-led companies and their performance compared.

Session 6: Key Financial Metrics (Self-paced)

This session begins with a few practice exercises to check and reinforce your learning from session five. Next, the concept of coarse-grained vs fine-grained financial metrics is introduced, and alternatives to the DuPont equation are provided, including the Return on Funds Employed (ROFE) equation.