"The city was then the great maw of American capitalism. That is to say, it took resources and raw materials from everywhere and converted them into money at an unprecedented rate."Christopher Hitchens*
Last week we teed up our plans to publish a series of short introductions on different functions of a business in hopes of spurring greater cross-functional literacy. My 10th grade social studies teacher taught us that political power is nothing more than a function of trade. Businesses are formalized groups of people who’ve come together for the explicit purpose of conducting trade, and finance—the subject of this week’s Good Work—is the system we’ve come up for keeping track of trade.
Finance folks are fond of foreign-sounding formulae like Free Cash Flow (FCF), Discounted Cash Flow (DCF), Customer Acquisition Cost (CAC), Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), and Single Income Two Children and Oppressive Mortgage (SITCOM—yes, that’s real). Their primary tools are financial statements (balance sheets, income statements, and cash flows), all saved in Microsoft Excel (no, not Google Sheets). The whole world kind of runs on Microsoft Excel.
It’s tempting to think of finance as a “numbers thing” and leave it up to “people on the business side.” But financial literacy—understanding how we trade things and move money around—will help anyone’s career. If you’re a designer, engineer, writer, or painter, you’ll eventually hit a brick wall in your career if you fail to grasp the relationship between the cost, revenue, and profit of whatever it is you’re creating.
We’ve pulled together a short list of tools and resources you can use to teach yourself the basics of finance. On top of that, we recommend you walk on over to the finance side of the house tomorrow and ask someone there out to lunch. Over Chipotle, find out what they do on a typical day, what kinds of things they were hired to worry about, how they got into the field, and how they think you could benefit from learning more about what they do.
Investopedia is a terrific corner of the internet. They’ve pulled together definitions of hundreds of financial terms in their Financial Dictionary. When you’re unclear as to what someone’s talking about in financial lingo, look it up there.
Yes, “Understanding Financial Statements,” by NYU Professor of Finance Aswath Damodaran is a 44 page PDF. But it’s also a terrific primer you can download, mark up, re-read, and refer to anytime you feel you’d benefit from understanding how to read the things.
When a company files for an initial public offering (IPO), they have to file a form called an S-1 that lays out the state of their finances for everyone to read. They’re wildly revealing documents, and fun to read if you’re beginning to geek out on finance. Check out “From Private To Public: How To Read An S-1,” by Alex Wilhelm.
Finally, I recommend signing up for Wharton’s Introduction to Corporate Finance on Coursera. It’s 100% free, and it will help you not only get the theory but it also has exercises to help you put it into practice.
That’s Good Work for this week. Looking forward to what’s next.