Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
  • Insights
    Open Insights Mega Menu
    • Business Insights Blog
      • Career Development
      • Communication
      • Decision-Making
      • Earning Your MBA
      • Entrepreneurship & Innovation
      • Finance
      • Leadership
      • Management
      • Negotiation
      • Strategy
    • All Topics
    • Free Business Lessons and E-Books

      Gain actionable skills and insights to advance your career.

    • Free Guide

      Learn how to formulate a successful business strategy.

  • More Info
    Open More Info Mega Menu
    • Learning Experience
      Master real-world business skills with our immersive platform and engaged community.
    • Certificates, Credentials, & Credits
      Learn how completing courses can boost your resume and move your career forward.
    • Learning Tracks
      Take your career to the next level with this specialization.
    • Financing & Policies
      • Employer Reimbursement
      • Payment & Financial Aid
      • Policies
    • Connect
      • Student Stories
      • Community
    • Need Help?
      • Frequently Asked Questions
      • Request Information
    • Apply Now
Login
My Courses
Access your courses and engage with your peers
My Account
Manage your account, applications, and payments.
HBS Home
  • About HBS
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
HBS Online
  • Courses
  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Insights
  • More Info
  • About
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers
  • My Courses
  • My Account
  • Apply Now
  • …→
  • Harvard Business School→
  • HBS Online→
  • Business Insights→

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

 
Filter Results Arrow Down Arrow Up

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

3 Financial Principles Every Professional Should Know

Three business professionals discussing financial principles
  • 12 Apr 2022
Catherine Cote Author Staff
tag
  • Accounting
  • Finance
  • Leading with Finance

For someone without a financial background, finance can seem intimidating. Amid the formulas, financial statements, and spreadsheets, finance’s true importance can get lost.

“Numbers on a spreadsheet aren’t really what finance is about,” says Harvard Business School Professor Mihir Desai in the online course Leading with Finance. “It’s about understanding businesses using the logics of finance. Finance isn’t about spreadsheets; it’s about real people, real companies, and how resources get allocated in your business and the economy more broadly.”

Financial principles can enable business professionals across industries to gain a deeper understanding of their companies’ financial health, how to measure created value, and how to best communicate with shareholders.

Here are three financial principles business professionals should know, no matter their industry or role.


Free E-Book: A Manager's Guide to Finance & Accounting

Access your free e-book today.

DOWNLOAD NOW

Why Learn Financial Skills as a Non-Finance Professional?

As a business professional in a non-finance role, learning finance basics can help contextualize your work within your company's broader benchmarks and goals.

With knowledge of financial principles, you can advocate for projects' expected return on investment (ROI), articulate the financial impact of your team’s work, and make strategic business decisions with maximum value creation in mind.

Additionally, it can make for more productive interactions with your firm’s finance and accounting department. Finance is often called the “language of business,” and speaking it can increase collaboration and communication across teams.

Related: Financial Terminology: 20 Financial Terms to Know

3 Financial Principles All Professionals Should Know

1. Cash Flow

Cash flow—the broad term for the net balance of money moving into and out of a business at a specific point in time—is a key financial principle to understand. There are several types of cash flow:

  • Operating cash flow: The net cash generated from normal business activities
  • Investing cash flow: The net cash generated through investment activities
  • Financing cash flow: The net cash generated from financial activities, such as debt payments, shareholders’ equity, and dividend payments

Taken together and detailed on the cash flow statement, these cash flow types paint a picture of the net cash flow that occurred over a specific period.

There’s one more type of cash flow that’s important to know: free cash flow. Free cash flow is the net amount of cash left over after taxes are paid; depreciation, amortization, and changes in working capital are accounted for; and capital expenditures (property, equipment, and technology investments) are subtracted. In short: It’s the cash left over that doesn’t need to be allocated anywhere.

In Leading with Finance, Desai calls free cash flow “finance nirvana” because it’s often leveraged to measure a company’s financial success. Once your company generates free cash flows, you’ve “made it,” so to speak. This cash is a metric investors look for when deciding where to allocate funds, and you can use it to provide returns to stakeholders. It can also be invested back into your business to create more free cash flow for subsequent periods.

Understanding cash flow types can help conceptualize which buckets your expenses fall into, provide context for budgeting, and offer insight into how your expenses and revenue factor into your company’s financial health.

Related: The Beginner’s Guide to Reading & Understanding Financial Statements

2. Time Value of Money

Finance is inherently forward-thinking and describes a company’s current position based on its trajectory. The time value of money (TVM) is a core financial principle that states a sum of money is worth more now than it will be in the future.

“If you want to understand what something is worth today, the only way to understand that is to look into the future,” Desai says in Leading with Finance. “Think about the economic returns—the free cash flows—as a way to understand what today’s values are. Something is only worth something today if it generates future benefits.”

Because of this, a specific sum of money’s value is dependent on how long you must wait before using it. The sooner you can use the cash, the more valuable it is.

The longer you must wait to use it, the more chances you miss to return your investment. To account for this when valuing a company, discount future cash flows to reflect their present-day values. Desai calls this the “gold standard of valuation.”

To calculate TVM for a sum of money, use this formula to solve for its future value (FV):

FV = PV x [ 1 + (i / n) ] (n x t)

In the TVM formula,

  • FV = the future value of cash
  • PV = the present value of cash
  • i = interest rate
  • n = number of compounding periods per year
  • t = number of years

If you’re in a non-finance role, chances are you won’t need to calculate TVM or discount cash flows yourself, but understanding the time value of money can enable you to make decisions based on it.

3. Risk and Return

One central question finance tries to answer is “How do you create value?” Both the time value of money and cash flows add perspective to this question: Value is created in the relationship between money and time, and when all allocations are accounted for.

An alternative perspective on value creation comes from another financial principle: risk and return. It’s a concept you’re likely familiar with: To see returns, you often need to take calculated risks. This is closely related to the concept of return on investment, which is the net amount of cash after the initial investment has been subtracted.

“The relationship between risk and return is one of the most important relationships in finance and all of economics,” Desai says in Leading with Finance. “By and large, human beings don’t like bearing risk. As a consequence of that, if they’re forced to bear risk, they demand something in return—they demand a higher return.”

The level of risk associated with investing in an asset dictates the level of return you can expect from it. The minimum viable return on an asset in relation to its cost and risk is called cost of capital.

Imagine your business is considering purchasing a cutting-edge piece of technology that would increase production speed and quality. The only problem: It’s incredibly expensive. You predict the ROI will be worth it and use loans and equity from outside sources to purchase the technology. The sources that provided your company with the capital to make this purchase take on a fair amount of risk. What if the technology doesn’t improve quality enough to increase revenue and justify the purchase?

The cost of capital is your financing sources’ minimum requirement for the return on their investment; it’s what they demand in return for taking on a high level of risk. When pooled together, the cost of capital for all of your capital sources is called the weighted average cost of capital (WACC).

Again, if you’re not a finance professional, you likely won’t need to calculate these values. However, understanding the costs associated with higher-risk projects and the need to deliver a minimum ROI to stakeholders can be valuable as you budget, request funding for projects, and strategize around long-term investments.

Access Your Free E-Book: A Manager's Guide to Finance and Accounting | Download Now

Launching Into Finance

Each of these financial principles provides a piece of the puzzle for conceptualizing a company’s financial health, the direction it’s headed, and how you can create value. By understanding how these pieces operate and fit into the larger whole, you can have conversations with key stakeholders and make informed decisions regarding your business’s future.

After learning about these basic principles, what questions arise regarding how your company is valued, tracks finances, and makes decisions? Use this primer as a launch pad to explore more of what finance can offer to your career.

“Finance is an art, not a science,” Desai says in Leading with Finance. “It’s filled with judgment; it’s filled with subjectivity. As a consequence, it’s really fun.”

Do you want to understand the key financial levers that drive business performance? Explore our six-week course Leading with Finance, one of our online finance and accounting courses.

About the Author

Catherine Cote is a marketing coordinator at Harvard Business School Online. Prior to joining HBS Online, she worked at an early-stage SaaS startup where she found her passion for writing content, and at a digital consulting agency, where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where she studied psychology, education, and Mandarin Chinese. When not at work, you can find her hiking, performing or watching theatre, or hunting for the best burger in Boston.
 
All FAQs

Top FAQs

How are HBS Online courses delivered?

+–

We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

Do I need to come to campus to participate in HBS Online programs?

+–

No, all of our programs are 100 percent online, and available to participants regardless of their location.

How do I enroll in a course?

+–

All programs require the completion of a brief application. The applications vary slightly from program to program, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Our easy online application is free, and no special documentation is required. All applicants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

After submitting your application, you should receive an email confirmation from HBS Online. If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted.

Updates to your application and enrollment status will be shown on your Dashboard. We confirm enrollment eligibility within one week of your application.

Does Harvard Business School Online offer an online MBA?

+–

No, Harvard Business School Online offers business certificate programs.

What are my payment options?

+–

We accept payments via credit card, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

What are the policies for refunds and deferrals?

+–

After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

 

Sign up for News & Announcements

Subject Areas

  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business & Society

Quick Links

  • FAQs
  • Contact Us
  • Request Info
  • Apply Now

About

  • About Us
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers @ HBS Online

Legal

  • Legal
  • Policies
Harvard Business School
Copyright © President & Fellows of Harvard College
  • Site Map
  • Trademark Notice
  • Digital Accessibility