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 able to justify proposals and projects from a financial perspective
• Improved decision-making through consideration of multiple effects on financial performance

1) The Financial Window of Business (Virtual Workshop 1)

This session uses a new business venture to introduce and explain the ‘Window Model’, 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 model will be used to explain important concepts and principles (financial 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 survival criteria that apply to all businesses.

2) The Window Model in More Depth (Self-paced Learning 1)

This session starts with a few practice exercises so you can check and reinforce your knowledge from session one. It then extends your knowledge by going deeper into the Cash Flow Statement, Balance Sheet and Income Statement.

You will learn about types of operational expenses, multiple levels of profit, three basic types of cash flow, the meaning of ‘capital' and ‘funds employed', two key sources of 'free funding' of assets. These concepts will all be used in later sessions.

3) Window Model Thinking (Virtual Workshop 2)

This session starts with a brief review before focusing on the concept of recognition to clarify the essence of accrual accounting and the real meaning of profit. 'Window Model thinking' is introduced and explored in detail via numerous 'micro-scenarios'.

The scenarios include cash and credit sales, customer prepayments, accrued expenses, interest on borrowings, creditor and debtor payments, asset improvements and repairs/maintenance, asset losses and write-offs, depreciation of assets, cash vs non-cash transactions, and month-end adjustments.

4) The Profit Creation Cycle (Self-paced Learning 2)

This session starts by briefly considering two basic strategies for increasing profit. Next you will 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 about the inherent role of financial leverage, the crucial role of asset utilisation, basic metrics for managing profit creation, the interpretation of return on equity (ROE), and the importance of ‘profit velocity’. The cycle will be applied to two engineering-led companies.

5) Metrics for Managing Performance (Virtual Workshop 3)

This session starts with a brief review, followed by a detailed look at metrics for assessing growth and profit generating efficiency. The latter is explained via the 'ROE Drivers Equation', which reveals the connection to return on funds employed (ROFE).

You will learn about the ‘nesting concept’, three financial 'levers' that operational managers can influence, the drivers of return on assets (ROA), and metrics that target specific financial performance. The ROE Drivers Equation and additional metrics will be applied to two engineering-led organisations.

6) Fast Financial Analysis (Self-paced Learning 3)

This session starts with a few practice exercises so you can check and reinforce your knowledge from session five. Two important areas that are covered are common-size analysis
of financial statements and the cash conversion cycle (CCC).

You will learn about common-size Balance Sheets and Income statements, the 'operating cycle' vs the 'cash conversion cycle', key metrics used to manage operating cash flow, relationship of common-size ratios to the ROE Drivers Equation, and ratios most relevant to service organisations.

7) Financial Acumen and the ROFE Model (Virtual Workshop 4)

This session starts with a brief review. The final component of the course is the ROFE Model, which consolidates prior learning and is a practical cognitive aid for day-to-day application
of the financial concepts and principle covered in previous sessions.

You will learn about the basic financial responsibilities of every manager, financial metrics influenced by using the ROFE model, the need to ‘sweat assets’ and optimise free money, relationship of the ROFE Model to cash flow drivers, and core and swing factors that influence operating cash flow.