TEAMFLY Team-Fly ® COMMENTS ABOUT ERICH A. HELFERT AND THIS BOOK “Erich Helfert’s book is a bona fide treasury for executives, managers, and entrepreneurs who need to understand financial management. I have used and recommended this great work in both corporate and university programs for more than ten years. Erich Helfert pos- sesses unique abilities to make clear the arcane that frequently enshrouds topics of finan- cial management.” Allen B. Barnes Past Provost IBM Advanced Business Institute (formerly Director of Executive Education, UCLA) “Erich Helfert’s book is a candidate for every consultant-to-management’s bookshelf. The underlying agenda is financial management as it pertains to effective resource allocation de- cisions. Framed in a dynamic model of the Business System, the beauty of Helfert’s presen- tation lies in its treatment of subsystems that differentiate between investment, operations and financing decisions, but which are also integrated into the overall managerial fabric.” Stanley Press CMC Book review September 2000 C2M Consulting to Management Journal “Erich Helfert possesses a rare ability to make financial concepts understandable to individu- als who lack a financial background. As a result we had Dr. Helfert conduct shareholder value creation classes for all senior managers and create a shareholder value course for all other salaried and hourly employees. The results of these efforts exceeded our high expectations.” L. Pendleton Siegel Chairman and Chief Executive Officer Potlatch Corporation “Erich Helfert has played an instrumental role in teaching HP managers of both financial and non-financial backgrounds in our long-standing Functional Management Program. His excellent financial overviews and simplified models effectively broaden our managers’ understanding and ownership of their fiscal responsibility to HP and our shareholders.” Robert P. Wayman Executive Vice President and Chief Financial Officer Hewlett-Packard Company “Dr. Helfert’s book and his teachings go a long way toward removing the mystery from the financial workings of an enterprise. His approach allows managers from all areas of the busi- ness to understand how their decisions impact shareholder value.” Stephen E. Frank President and Chief Operating Officer Southern California Edison “Erich Helfert has contributed to the development of financial skills of TRW managers through his case study preparation and presentations, his book Techniques of Financial Analysis, and his instruction. He continues to be included as a highly rated faculty member in TRW’s management development programs.” Peter S. Hellman Past President and Chief Operating Officer TRW Inc. hel78340_FM.qxd 9/27/01 10:56 AM Page i This page intentionally left blank. FINANCIAL ANALYSIS: TOOLS AND TECHNIQUES A Guide for Managers ERICH A. HELFERT, D.B.A. New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto McGraw-Hill hel78340_FM.qxd 9/27/01 10:56 AM Page iii Copyright © 2001 by The McGraw-Hill Companies. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-139541-5 The material in this eBook also appears in the print version of this title: 0-07-137834-0. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trade- marked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corpo- rate training programs. For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. 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DOI: 10.1036/0071395415 abc McGraw-Hill To Anne hel78340_FM.qxd 9/27/01 10:56 AM Page v This page intentionally left blank. ABOUT THE AUTHOR Erich A. Helfert is an internationally recognized management consultant in cor- porate finance, strategic planning, and executive education in financial/economic decision making and shareholder value creation. He gained his professional expe- rience from a combination of distinguished business and academic careers. Dr. Helfert was vice president, corporate planning, at Crown Zellerbach Corpora- tion, a major integrated paper and forest products company. Prior to his 20-year corporate career, he served on the faculty of the Harvard Graduate School of Busi- ness for eight years, teaching finance and managerial economics in the MBA pro- gram, and consulting in management development and strategy with major companies. A native of the Sudetenland, formerly Austria, he received his BS from the University of Nevada and earned both an MBA (with high distinction) and a DBA (as a Ford Foundation Fellow) at the Harvard Business School. Dr. Helfert writes and lectures extensively in his field, and his books and articles have been pub- lished in the United States and abroad. His first literary work, Valley of the Shadow, a factual historical novel about his experiences in central Europe at the end of World War II, was published recently. Dr. Helfert is cofounder, chairman and CEO of Modernsoft, Inc., San Ma- teo, California, developers of Financial Genome, an advanced knowledge-based financial analysis and business modeling software, which is complementary to Fi- nancial Analysis: Tools and Techniques. vii hel78340_FM.qxd 9/27/01 10:56 AM Page vii Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use. This page intentionally left blank. ix CONTENTS Preface xvii Introduction xxi Chapter 1 The Challenge of Financial/Economic Decision-making 1 Lessons for the Millennium 2 The New Economy 2 Some Key Questions 3 The Basics Never Change 6 The Economic Manager 7 Understanding Business Economics 8 Appropriate Economic Tools 9 The Practice of Financial/Economic Analysis 10 Day to Day Decisions and Operational Planning 10 Supporting Strategy Development 11 Performance Assessment and Incentives 12 Valuation and Investor Communications 14 The Value Creating Company 15 Relevant Decision Information 15 Economic Incentives 17 Total Systems Management 18 Chapter 2 A Systems Context for Financial Management 21 A Dynamic Perspective of Business 22 Decision Context 22 The Business System 26 Investment Decisions 29 Operating Decisions 31 Financing Decisions 33 Interrelationship of Strategy and Value Creation 36 hel78340_FM.qxd 9/27/01 10:56 AM Page ix Copyright 2001 The McGraw-Hill Companies, Inc. 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[...]... included and examples are presented in this readily accessible format to ease the mechanical aspects of analysis An entirely new feature is the optional availability of the advanced, knowledge-based financial analysis software package, Financial Genome, created by hel78340_FM.qxd 9/27/01 10:56 AM Preface Page xix xix Modernsoft, Inc This professional application enables the user to develop financial statements,... 9/27/01 10:57 AM Page 2 2 Financial Analysis: Tools and Techniques For many years the purpose and contribution of this book have been to help make financial/ economic analysis a practical, understandable and usable process for managers and analysts, and we argue with conviction that applying these concepts to both established and emerging businesses has rarely been more important than now As we enter... area: day-to-day decisions and operational planning It successively rises via strategy development, investment analysis and capital structure planning, on to performance assessment and incentives, and finally to valuation and investor communication Each of these areas contains challenges and issues in the practice of analysis and decision-making that the economic manager must address Day-to-Day Decisions... the whole range of key financial measures, and integrated financial projections and plans, as well as ad hoc financial analyses The patented knowledge-based technology enables the user to readily perform these tasks from spreadsheet data or data bases with assured internal consistency, without having to worry about cell locations and formulas Knowledge of financial terms, relationships, and statement... Financial Analysis: Tools and Techniques The Practice of Financial/ Economic Analysis The financial/ economic analysis sponsored and used by the economic manager can be viewed within a broad hierarchy of decision-making needs The diagram in Figure 1–1 shows four key areas in the typical business where financial/ economic analysis is a necessary ingredient This conceptual pyramid rests on the broadest area:... its decisional context, and its relationship to financial statements and analytical tools as presented in Chapter 2 The coverage of analytical methods begins in Chapter 3 with funds flow analysis, moves on to financial performance analysis, covers financial projections, and culminates in a discussion of the financial dynamics useful in modeling financial conditions and growth capabilities Chapters 7 through... AM Page 9 CHAPTER 1 The Challenge of Financial/ Economic Decision-Making 9 information and data are relevant for the purpose, and judging the analytical results from a long-term viewpoint of value creation The economic manager is sufficiently familiar with information sources within the company, and works in close collaboration with financial and other staff persons to make sure that relevant data are... Decisions and Operational Planning One of the most important areas of applying basic financial/ economic analysis is the support of day-to-day decisions made by managers and employees We’re talking about the operational part of the enterprise, in which strategic direction and operational plans are translated into action Despite its importance, analytical practice in this area often tends to be the least developed,... executive a concise, practical, usable, and up-to-date overview of key financial/ economic analysis tools The presentation format has always been carefully designed to help the reader understand the linkage between management decisions and their impact on the financial performance and the economic value of a business This book helps the reader to interpret financial reports, develop basic financial projections,... backdrop both for the financial/ economic dimensions of systematic business management and for understanding the nature of financial statements, data, and processes underlying financial analysis techniques All subjects are viewed in the context of creating shareholder value a fundamental concept that is revisited in the final chapter on managing for shareholder value While the tools and techniques covered . examples are presented in this read- ily accessible format to ease the mechanical aspects of analysis. An entirely new feature is the optional availability of the advanced, knowl- edge-based financial. California, developers of Financial Genome, an advanced knowledge-based financial analysis and business modeling software, which is complementary to Fi- nancial Analysis: Tools and Techniques. vii hel78340_FM.qxd. develop finan- cial statements, the whole range of key financial measures, and integrated finan- cial projections and plans, as well as ad hoc financial analyses. The patented knowledge-based technology