A couple of weeks ago, I completed a Finance for Senior Executives course at Harvard Business School. I took the course because, while I feel like I have a pretty good grasp of finance from business school and work experience, I wanted to refresh my brain on the fundamentals and go a bit deeper than I've been able to over the last several years. The course was excellent, and I highly recommend it for operating executives who find themselves in a similar spot. The content was designed for senior executives who don't work directly in the finance function. The course had a virtual portion followed by four days of in-person living and studying on the HBS campus. The class was grounded in the case study method, with 13 real-life case studies (including a great one where we had to try to rationalize Peloton's stock price in the Summer of 2019...). The class was filled with an incredible group of intelligent, thoughtful, energetic, and self-motivated students who were really fun and inspiring to get to know — 89 students from 21 countries. Just a great group. The syllabus covered six primary topics:

Measuring Performance and Financial Ratios
Discounted Cash Flow
Valuation
Capital Structure and Leverage
Mergers, Distress, and Recapitalizations
Capital Allocation and Pursuing Margin and Growth

As we went through the coursework, I made a note of some of the more insightful reminders, ideas, concepts, and topics that stuck with me. I thought I'd share some of them here:

1/ The primary job of finance is to ensure that the company doesn't run out of cash and makes good financial investments. Watching working capital (current assets - current liabilities) closely is crucial — lots of very profitable companies run out of cash. I’ve seen this quickly become an issue for tech companies that don’t hold inventory and have taken their eye off working capital, as well as tech enabled healthcare service companies that have a revenue cycle lag.

2/ Terminal value of a company (its value in perpetuity) should be used carefully, as there's never really a company that runs forever. That said, over the long term, the discount rate will balance this and make the calculation more reasonable. The terminal value of a company should be calculated after growth and margin have stabilized.

3/ Net present value measures the dollar value an investment adds or subtracts by comparing the present value of cash inflows and outflows. Internal rate of return calculates the percentage rate of return that makes net present value zero.

4/ There's really no such thing as a "good" growth rate or margin or financial ratio. It all depends on the context and the particular situation. It's sort of like a size 10 shoe. Does it fit? Well, it depends.

5/ You should care a lot more about the market value of a company than the book value of a company as that’s the value that investors will pay assign to the firm, though the latter is a lot easier to calculate and make sense of.

6/ Bad economics in an industry almost always beats great management over the long term.

7/ Don't discount the fact that your debtholders are important stakeholders and investors. While interest payments cap their upside, they are the first investors to get paid in a liquidation, and returning their capital and providing them with interest payments drives substantial value. Too often, we only consider equity holders when we think about enterprise value creation.

8/ A good formula to memorize is valuing a company using its free cash flow projections. As I've written here many times, the value of a company is the present value of the discounted free cash flow you can take out of it. Free cash flow can be calculated using the balance sheet and income statement with the following calculation: EBIAT (earnings before interest after taxes) + depreciation - cap expenditures - change in working capital. It's not about memorizing the formula; it's about understanding how the balance sheet and income statement interact and how to use them to calculate the cash flows a company will generate.

9/ Debt is a government-subsidized form of capital. The tax deduction on interest is the major value in financing an investment with debt over equity. This is really meaningful. Obviously, it is less relevant for startups that still need to produce profits.

10/ The "irrelevance hypothesis" says that in an ideal world with no market imperfections, the dividend policy of a company is irrelevant to its overall valuation because shareholders can create their own homemade dividends by selling their shares. Of course, real-life market imperfections always need to be logically applied when creating a dividend policy.

11/ Operating leverage is an important metric to watch over the long term. High operating leverage means that small changes in sales lead to disproportionate increases in operating profit because fixed costs remain constant while revenue increases.

12/ Businesses can be placed on a spectrum from "high tech," which are high growth/low profit, to "cigar butt" businesses which are low to no growth/high profit (companies that only have a few puffs left). There’s nothing thing wrong with a company that isn’t growing but is throwing off cash and not all companies need to stay in business forever. It's important to understand where a company is on this spectrum to guide where to place capital — invest in growth, return to shareholders, or pay down debt.

13/ Dividend payments are effectively the same as a corresponding investment in growth when the dollars generated and value creation are the same (the only relevant difference is that in one scenario, the money is in the investor's pocket versus the company's pocket). But the value is the same. This is a good reframing, similar to the importance of returning capital to debtholders. Capital is capital regardless of whether the investor holds it in your company or puts it in an index fund.

14/ Generally, markets value growth increases over margin increases because growth compounds on itself. The exception is low-margin businesses. You'll get more upside there from growth. All should be calculated through discounted cash flow analysis.

15/ High discount rates favor high-margin businesses, and low discount rates favor high-growth businesses.

16/ Detailed discounted cash flow rates often aren’t used on a practical basis inside of companies. The reason, generally, is that there are often more ideas that exceed the discount rate hurdle than can be executed. That said, it’s crucial that all leaders understand discounted cash flow, NPV, and IRR.

I'm really glad I took the class. I'll look into other courses like this to deepen my knowledge in areas where I haven’t gone as deep as I’d like in recent years.