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. Click Here for Terms of Use. [...]... of Use hel78340_ch01.qxd 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... system, 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... hel78340_ch01.qxd 9/27/01 10:58 AM Page 10 10 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... students (graduate and undergraduate) and practitioners because of its clarity and commonsense presentation Straddling the educational and professional markets, the book requires little if any background in finance and accounting and provides an accessible, self-contained overview of the essential financial management concepts and tools Countless students have found the book an understandable and useful guide... 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... John W Wu, and Lee Hecht for their enthusiasm and expertise in adapting the major concepts of the book and its approach in our development of the Financial Genome software and its accompanying educational templates Their insights and suggestions were most valuable during the recent revision of this book, and their unwavering dedication to creating this unique professional financial analysis and planning... best-selling Techniques of Financial Analysis, which, with more than half a million copies in print over the past 38 years, has given the student, analyst, and business 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... 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 and Operational... hel78340_ch01.qxd 4 9/27/01 10:57 AM Page 4 Financial Analysis: Tools and Techniques It is here that the interpretation of the new economy and its innovative aspects began to conflict with basic economic reality in the past several years As high-technology and “dot.com” enterprises attempted to seize the potential of innovative advances, basic notions of achieving positive cash flow and profits were cast aside Instead,... 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 at hand for sound analysis and . 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. 423 APPENDIX I Financial Analysis Using Financial Genome 425 APPENDIX II Glossary of Key Terms and Concepts 433 APPENDIX III Financial Information and On-Line