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Acquiring a basic knowledge of finance for making business decisions – the goal of the Focused Program run by Professor Martí Pachamé

The latest session of the Focused Program, held online, was entitled “Interpreting financial information to make strategic decisions". It was presented by Martí Pachamé, a lecturer on the MBA, EMBA and IMBA programs.

Tuesday, 10 de October, 2017

The key objective of this Focused Program was to enable participants to learn and be equipped with basic financial knowledge, as fundamental as the main financial statements, the concepts of the balance sheet and profitability, and the various methods of financial analysis. This knowledge is crucial for all students of EAE Business School when it comes to making any kind of business decision.

The man in charge of achieving this goal was Martí Pachamé, an expert in the financial sector and a lecturer on EAE Business School’s MBA, EMBA and International MBA programs. To start the session, he listed the main financial statements. The balance sheet “is a document that reflects the true and faithful image of a company at any given moment”, explained the expert in reference to the first of these documents, which is perhaps the founding pillar of financial accounting, as it presents the past, present and future data of any company. “It shows their assets, rights, debts and capital”, he added.

The income statement, the statement of changes in equity and the statement of changes in cash-flow were the other financial statements covered in the online session. 

In terms of decision-making, Professor Pachamé listed a series of questions that need to be answered, including “Do we have enough capacity to pay for the capital and the interest on loans?” and “Do the sales achieved justify the resources used?”.

Moreover, the objective of financial control is to evaluate the following concepts: the rate of return, solvency and profitability. He defined the last of these concepts as “an investment or economic activity generating more profit than loss”. The expert went on to explain several related basic concepts, including the relationship between risk and profit, opportunity cost, leverage and adequate funding.

Profitability is a concept that can be measured and, to do so, we need to take four factors into account: the profit obtained, the amount of capital required, the time that has passed since the investment was analysed and the risk. “The final objective of shareholders is to obtain a certain level of profitability. If companies do not achieve this, it will undergo a process of divestment”, highlighted Pachamé.

Financial analysis consists of vertical analysis and horizontal analysis, tools that can be used to analyse and interpret a company’s financial status.

“Once the balance sheet is duly prepared, we can proceed with the calculation of the relevant percentages. We calculate the proportion that each asset group represents of the total assets”. These were the instructions given by the lecturer for undertaking a vertical analysis. One of the objectives is to analyse whether an organization’s assets are distributed equitably in line with its financial needs.

Moreover, horizontal analysis was defined by the expert as “a dynamic analysis that focuses on the changes or movements of each account between one period and another, in terms of the general balance sheet and the income statement”. The aim is to ascertain the absolute or relative variation that each item of the financial statements has undergone, reflecting the growth or decrease in an account over a certain period of time.

To conclude, Professor Pachamé shared a more in-depth insight into financial ratios, also known as financial indicators. These coefficients provided by financial measurement units enable an analysis of a company’s productivity and its current or past status, the overall aim of which is to define a company’s productivity

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