The Busy Consultant’s Mini - MBA

The Busy Consultant’s Mini-MBA

This summary distills key business disciplines for consultants, offering concise insights for practical application. Learn core principles of accounting, finance, strategy, and more, all in one book.

Expected Outcomes: Make sound financial decisions. Develop effective business strategies. Communicate effectively with stakeholders.

Core Content:

1. Fundamental Accounting Principles & The Accounting Equation:

• Accrual Principle: Recognize revenues and expenses when earned/incurred, not just when cash changes hands.
• Going Concern: Assume the business will continue operating in the foreseeable future.
• Consistency: Use the same accounting methods from period to period.
• Materiality: Only report significant transactions in detail.
• Double-Entry Bookkeeping: Every transaction affects at least two accounts.

2. Reading and Interpreting the Three Primary Financial Statements:

• Income Statement: Shows revenue, expenses, and profit/loss over a period. Revenues - Cost of Goods Sold = Gross Profit. Operating income = Earnings Before Interest and Taxes.
• Balance Sheet: A snapshot of assets, liabilities, and equity at a specific time.
• Statement of Cash Flows: Breaks down cash inflows and outflows into operating, investing, and financing activities.
• Connect across statements to deepen understanding and flag inconsistencies.

3. Revenue Recognition and Expense Matching:

• Revenue Recognition: Recognize it when performance obligations are satisfied and it's measurable and realizable.
• Expense Matching: Record costs (expenses) in the same period as the revenues they help generate.

4. Accrual vs. Cash Accounting:

• Accrual: Revenues when earned, expenses when incurred. Accurate but complex, monitor cash flows.
• Cash: Revenues when cash received, expenses when paid. Simple but can distort profit/loss.

5. Key Financial Ratios and Their Interpretations:

• Liquidity Ratios: Measure ability to meet short-term obligations like current ratio and quick ratio.
• Profitability Ratios: Assess how effectively a company generates earnings like gross margin, operating margin, net profit margin, and return on equity.
• Leverage Ratios: Show debt levels like debt to equity and debt to assets.
• Efficiency Ratios: Evaluate how well assets/liabilities generate revenue like inventory turnover, receivables turnover, and asset turnover.

6. Red Flags and Common Misconceptions:

• Unusual revenue trends, frequent restatements, changes in accounting policies, discrepancies between net income and cash flow.

  Action suggestion: Compare multiple periods, examine key ratios and seek independent views.

7. Cost Classifications and Behavior (Fixed vs. Variable):

• Fixed Costs: Remain constant regardless of activity level. Suggestion: Manage risk by carefully planning capacity.
• Variable Costs: Change in direct proportion to activity level. Suggestion: Understand what your variable costs are so that you can have pricing flexibility.

8. Break-Even Analysis and Contribution Margin:

• Calculated by subtracting variable cost per unit from the sales price per unit. Break-even units=Total Fixed Costs/Contribution Margin per Unit. Note: Good for pricing, capacity planning, evaluating financial viability of projects.

9. Budgeting and Forecasting:

• Budgets: Project revenues, expenses, and metrics over a period.
• Forecast: Adjust projections based on real-time data. Types of Budgets include operating, capital, cash, and zero-based budgeting.
  • Suggestion: Use rolling forecasts to continuously update estimates and adapt to market shifts. *

10. Activity-Based Costing and Cost Allocation:

• Improves accuracy by applying overhead costs to the activities and cost drivers that consume resources, then allocates those costs to individual products or services.
• Action suggestion: Identify key activities and cost drivers.

11. Performance Measurement:

• Key Performance Indicators (KPIs): Quantifiable metrics aligned with organizational goals. Suggestion: Track KPIs over time to spot trends.
• Balanced Scorecard: Framework balancing financial & non-financial measures. With a holistic approach to metrics linked to customer satisfaction it fosters continuous improvements with better strategic alignment. *

12. Relevant Costs for Decision-Making:

Relevant costs influence and effect decisions, that are future oriented and can vary between alternatives (incremental costs, avoidable costs, and opportunity costs).

Note: Be careful because sunk costs are not relevant.*

13. Time Value of Money Essentials

Concepts: PV = What a future sum of money is worth in today’s terms. FV = Projects how much a current sum of money will grow. Discount Rate: Converts future cash flows into present value. Formulas: Present Value: PV=FV / (1+r)^n Future Value: FV = PV * (1+r)^n Great for investment and financing decisions. *

14. Capital Structure: Debt vs. Equity:

Debt Financing: Borrow funds (tax benefit, retain ownership, can be cheaper) Disadvantages: fixed obligation, credit constraints, increased risk. Equity Financing: Issue shares (no fixed repayment. shares risk, flexability) Disadvantages: owner dilutent, higher cost capital, market perception. *

15. Valuation Fundamentals:

Tools: Net Present Value (NPV), Internal Rate of Return (IRR), Discounted Cash Flow (DCF).*

Q&A

Q: How does accrual accounting differ from cash accounting?

A: Accrual accounting recognizes revenues and expenses when they are earned or incurred, while cash accounting records them only when cash changes hands. Accrual accounting gives a more accurate picture of financial performance, but cash accounting is simpler.

Q: What are some typical red flags in Financial Statements?

A: Unusual revenue spikes, frequent restatements, discrepancies between profits and cash flow, and surging receivables/inventory are all signs to watch.

Q: What is breakeven analysis, and why does it matter?

A: Breakeven analysis determines the sales level where total revenue equals total costs. It helps guide pricing, capacity, and product viability.

Q: What are relevant costs, and why do they matter for decision-making?

A: Relevant costs are future cash flows that differ among alternatives. They exclude sunk costs and allocated fixed costs. Focusing on these can lead to the soundest economic decisions.