Friday, January 14, 2011

Finance for Engineers

Last summer I took a great mini-course at MIT Sloan on Finance. It's essentially a breadth-first review of the MBA course complete with three case studies and a review of project evaluation methods via net present value analysis. Approximately 80% of the attendees were engineers/techies with 10+ years experience.. and maybe 25% w/ PhDs.

The first case study is Wilson Lumber from Harvard. The material is copyrighted, yet these links look like accurate distillations by business students.
The initial position is that Wilson Lumber growing small business with good suppliers and loyal customers. Volume and revenue are all up period over period. Question is should the bank increase is line of credit to fund the business. Once you break down the financial statements and model the business, the answer is No. Essentially Mr Wilson is over extended by many measures and is growing at the expense of his balance sheet, loaning him money will only make the problem bigger down the road. His basic options are to take in a partner as co-owner for cash, go broke or raise prices to lower volume and improve margins and slowly rebuild the balance sheet.

We then went through two NPV exercises. The first was a basic analysis of go/no-go on an engineering project with a bottom up analysis via putting all cost/benefit assumptions in a model and iterating though possibilities. The second was an analysis of a joint-venture between two biotech companies. Everything from external capital, deal structure to market penetration projections were worked in. Very informative and pretty interesting work for engineers to do once the terminology and methods were explained.

Professor Jenter shared two amusing anecdotes:
  • His MIT and Stanford MBA students often run off to found start-ups and forget the basic Wilson Lumber case. By the time they approach him for help it's too late and they are in Mr Wilson's position: shut-down, take in $$ and lots of equity dilution (and loss of control) or slow growth dramatically.
  • Also a quote along the lines of "Startups founded by MIT PhDs fail at a rate above far average".
This certainly hammered home the lesson that strategic planning for growth is very important, even for what look like non hyper-growth (software) companies. I'd recommend this course to any engineer wanting a quick structured intro to basic financial management.

Posted via email from nealrichter's posterous

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