Introduction

In understanding the 5 Ways That HVAC Systems Keep You Comfortable we learnt that air purification is  Air purification is a critical aspect across diverse industries, where the prevention of unwanted debris and the maintenance of a clean working environment are paramount. Filters play a pivotal role in achieving these objectives and can be categorized based on their filtration type and porosity, with porosity referring to the number of pores per unit area in a filter.


High-Efficiency Particulate Air Filters (HEPA)

One widely employed type of filter is the High-Efficiency Particulate Air (HEPA) filter. These filters excel in eliminating air particulates, with pre-filters used in clean rooms typically ranging from 30-95% efficiency. For optimal efficiency, final filters should be HEPA filters, boasting an impressive 99.97 to 99.99% efficiency on 0.3-micron particles. HEPA filters are constructed from sub-micrometer-diameter glass fibers formed into pleated paper mats.

Ultra-Low Penetration Air Filters (ULPA)

ULPA filters are another powerful option, boasting an efficiency of 99.99% on 0.3-micron particles. Similar to HEPA filters, ULPA filters comprise a filter media, and their sealing and frame construction render them even more efficient than HEPA filters.

Activated Carbon Filters

Activated carbon filters find widespread use in eliminating objectionable odors and irritating vapors of gaseous airborne particles, typically ranging from 0.003 to 0.006 microns in size. These filters are often employed as pre-filters for protection, with pleated filters of 50-micron depth added to enhance the efficiency of packaged plants.

Plasma Air Purifier

Utilized in split, window, and package air conditioners, plasma air purifiers leverage advanced technology to remove the smallest germs, bacteria, smoke, unpleasant odors, and microbes. This innovative filtration method contributes to creating a healthier and more breathable indoor environment.

Conclusion

In summary, understanding the various air purification methods is crucial for selecting the most suitable filter for specific applications. From HEPA and ULPA filters, renowned for their exceptional particulate removal efficiency, to activated carbon filters addressing odors and vapors, and cutting-edge plasma air purifiers targeting microscopic contaminants, each method serves a unique purpose in enhancing air quality across diverse settings. As industries continue to prioritize clean and safe working environments, staying informed about the latest advancements in air purification technology is key.

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Introduction: The Importance of Financial Management

No matter what, don’t run out of money. Nothing else in this blog matters if you run out of money!

In the world of entrepreneurship, there’s a fundamental principle that stands above all: never run out of money. This blog centers around the crucial concept that ‘cash is king.’ Without a doubt, financial stability serves as the cornerstone for any business, akin to a solid foundation supporting a structure. Join us in this edition of Engineer Your Finances as we navigate through the intricate world of financial strategies, drawing parallels between the precision of engineering and the meticulous planning required to ensure the fiscal health of your enterprise.

From understanding burn rates to deciphering creative accounting techniques, we guide engineers and entrepreneurs through the maze of strategic cash deployment and pricing strategies. Each concept is presented with an engineering lens, making it accessible and applicable to those with a penchant for precision.  Remember, in the realm of business, just as in engineering, a well-thought-out plan and careful execution can be the difference between success and failure.

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Burn Rate – The Furnace or Boiler of Your Business

Understanding Burn Rate

In engineering, just as you calculate the rate of material consumption in a project, your business has a ‘burn rate’—the net cash outflow each month. If this rate exceeds your income, it’s like running out of essential construction materials halfway through a project. To avoid this, regularly monitor your burn rate and adjust your financial plans accordingly.

Imagine planning a bridge construction project. If you only consider the month-end figures, you might realize you lack crucial resources to pay your suppliers in the middle of the project. Similarly, in business, understanding the timing of cash inflows and outflows prevents unexpected shortfalls. Plan strategically to ensure your cash is available when needed.

Burn Rate in Action

Think of your business’s burn rate as the furnace or boiler sustaining operations. Imagine a plant with a furnace that consumes materials at a certain rate. If the furnace burns materials faster than they are supplied, you’ll face a shortage. Similarly, if your business’s burn rate surpasses incoming funds, you risk running out of financial fuel.

Practical Application: Consider a scenario where your business expenses are consistently outpacing revenue. Just as a vigilant engineer monitors the rate of material consumption in a project, regularly assess your burn rate. If it’s trending towards exhausting your financial resources, adjust your business strategies promptly to maintain a healthy financial furnace.

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Strategic Cash Deployment

Once you’ve understoon why cash is king and mastered your burn rate and timing, the next step is strategic cash deployment. Consider stashing enough cash to cover six months of expenses in case of unforeseen circumstances. Beyond this safety net, engineers can venture into slightly riskier yet potentially more rewarding investments. Deploying cash strategically is akin to designing a structure with built-in redundancies for unexpected loads. Consider stashing cash for a rainy day—like having backup support columns. Beyond this, diversify your investments intelligently. ‘Ladder’ your investments just as you stagger support structures in a building to ensure stability. This way, you’re not heavily reliant on a single element.

Practical Application: Allocate a portion of your excess cash to short-term securities guaranteed by the government. By diversifying the maturity dates, you avoid making heavy bets on interest rate movements. This ensures your cash is not only preserved but has the potential for growth.

Creative Accounting: Reading Between the Lines

Understanding Creative Accounting

Imagine constructing a bridge with unconventional materials and methods to cut costs. This would be akin to ‘creative accounting,’ which involves unconventional practices to present financial reports in a certain light. It’s like building a bridge with unusual designs—novel but potentially risky.

Creative accounting, with its deviation from standard practices, demands careful scrutiny. As engineers value precision, let’s analyze creative accounting as a process of manipulating financial reporting for ulterior motives. Consider the following techniques:

Manipulating Figures

A company might manipulate figures by choosing different methods for accounting practices, such as depreciation, asset valuation, or research and development. Understanding these manipulations is crucial for accurate financial analysis.

‘Big-Bath’ Provisions

Utilizing ‘big-bath’ provisions involves writing down assets in the acquisition period to show increased non-exceptional profits later. This strategy might artificially lower stock values, impacting the overall financial health portrayed in the profit statement.

Pricing Strategies: Formulating a Win-Win Situation

In engineering terms, the destiny of your business is intricately linked to the precision of your pricing strategy. To ensure sustained profitability and longevity, small business proprietors must meticulously calibrate their pricing approaches, just as engineers fine-tune their designs for optimal performance.

Traditionally, many business plans have recommended adopting the role of the market’s lowest-price provider. This inclination often stems from quickly assessing competitors and assuming that business success hinges solely on offering the lowest prices, akin to optimizing a design for minimal material costs.

Even though cash is king, being the cheapest option doesn’t always guarantee success for small businesses. Larger competitors, equipped with substantial resources and lower operating costs, can easily outmatch smaller enterprises relying solely on competitive pricing, much like how a well-funded project can outperform a budget-constrained one. Avoiding the low-price strategy requires a more comprehensive examination of market demand, considering factors such as:

  • Competitive Analysis: Instead of just looking at competitors’ pricing, assess the entire package they offer. Analyze whether they cater to cost-conscious consumers or a more affluent demographic, similar to evaluating the features of competing engineering solutions.
  • Ceiling Price: Ascertain the maximum price the market is willing to bear, drawing parallels to determining the upper limits in design specifications. Consult experts and gather insights from customers to delineate pricing boundaries.
  • Price Elasticity: Understand the demand for your product or service, considering factors like limited competition, perceived quality, and consumer habits. This is analogous to gauging the structural flexibility of a material in engineering design.

Understanding the demand structure in your industry is pivotal, much like how engineers thoroughly understand the materials and conditions they work with. Evaluate your costs and profit objectives outlined in your business plan or financials. While the allure of a low-price strategy might be tempting, small businesses should exercise caution, especially considering scenarios like price wars that could inadvertently draw them into cutthroat competition.

To sidestep the perils of a price war, consider the following engineering-inspired strategies:

  • Enhance Exclusivity: Offer products or services exclusive to your business, providing a shield against plummeting prices, similar to creating unique features that set your design apart.
  • Eliminate High Maintenance Goods: Identify and discontinue products or services incurring high customer service and maintenance costs, similar to removing components with high maintenance needs in a project.
  • Value-added Services: Differentiate your business by incorporating value-added services, analogous to adding innovative features that enhance the overall functionality of a product or design.
  • Branding: Cultivate a strong brand presence in the market, recognizing that a reputable brand, like a well-known engineering firm, often fares better in resisting the impacts of a price war.

It’s advisable for small businesses to leave the arena of price-cutting and battles to larger enterprises. By formulating robust pricing strategies, small businesses can navigate away from the pitfalls of price wars and maintain a favorable pricing position, much like engineering projects that stand the test of time due to meticulous planning and execution. Meticulously contemplate your pricing decisions, recognizing that the success of your business hinges on them.

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Conclusion: Engineering Financial Success

In conclusion, engineers entering the realm of entrepreneurship must master the intricacies of cash flow management, decipher creative accounting practices, and craft effective pricing strategies. By understanding that cash is king and practically applying these financial principles, you can navigate the business terrain with confidence, ensuring the success and sustainability of your venture.

Thank you for joining us in this edition of ‘Engineer Your Finances.’ Stay tuned for more insights into merging the worlds of engineering and finance, creating a roadmap for your entrepreneurial journey.

 

 

 

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Have you ever wondered about the invisible factors that determine whether a room feels just right or uncomfortably stuffy? The answer lies in the intricate world of Heating, Ventilation, and Air Conditioning (HVAC) systems, where the quest for human comfort begins with the very air we breathe.  We’ve had a look at How Air Conditioners Work in Summer and How Air Conditioners Work in Winter and now we need to find out exactly where the blance is struck by HVAC systems between these two extremes of operation conditions known as the human comfort zone.  In this exploration of the science behind creating the perfect indoor environment, we delve into the vital role of oxygen supply and its profound connection to achieving the coveted “comfort zone.”

Human Comfort Zone as shown on a psychrometric chart.
Human Comfort Zone as shown on a psychrometric chart. Source: Springer

The human comfort zone, in the context of environmental conditions, refers to a range of thermal, humidity, and air quality parameters within which individuals experience a sense of physical and psychological well-being. It is defined by standards and guidelines set by organizations like the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE). The comfort zone typically includes a specified range of indoor air temperatures, relative humidity levels, air motion characteristics, and air purity conditions that collectively aim to ensure occupants feel comfortable and maintain optimal productivity. Deviations from this defined zone may result in discomfort, impacting an individual’s overall satisfaction and well-being in a given indoor environment.  With that understanding, let’s settle in to understanding the 5 ways HVAC systems keep you comfortable.

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1. Oxygen Supply – Breathing Life into Comfort

The importance of maintaining optimal oxygen levels ties directly to HVAC systems achieving human comfort. Adequate oxygen supply is not only essential for the body’s combustion processes but also plays a crucial role in sustaining a comfortable indoor environment. HVAC systems, designed with precision, ensure proper air circulation to meet the oxygen requirements, contributing to a space where occupants can live and work satisfactorily.

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Similar to other machines, the human body demands a sufficient oxygen supply to sustain combustion (food digestion). This process transforms chemical energy into work, releasing carbon dioxide as exhaust gas. Each individual needs approximately 0.65 m³ of oxygen per hour in normal conditions and produces 0.2 m³ of carbon dioxide. Monitoring the rise in CO2 concentration serves as an indicator of oxygen consumption.

The atmospheric CO2 level is around 0.03% by volume, crucial for the proper functioning of the respiratory system. When CO2 surpasses 2%, the partial pressure of oxygen decreases, making breathing challenging. Extreme discomfort arises at 6%, and unconsciousness can occur at 10% CO2.  Proper air-supply in air-conditioned spaces is vital to prevent CO2 levels from exceeding the minimum threshold.

2. Heat Removal – The Art and Science of Temperature Control

The human body operates as an engine, converting thermal energy into mechanical work with a thermal efficiency of 20%. The remaining heat is dissipated into the atmosphere. Even when not engaged in external activities, internal work such as blood circulation and respiratory muscle function still occurs.

As a practical example; should an individual be allocated a 6 m³ space without the exchange of heat and air from external sources, the temperature within the space would elevate by 0.136°C for every kilojoule of added heat. Consequently, the temperature would surge by 43°C per hour, given that the human body expels 320 kJ of heat within the same timeframe.  This because in the given scenario, the space’s temperature rise is directly proportional to the heat added to it, following the principles of energy conservation. The calculation considers the specific heat capacity and volume of the space, providing insights into the temperature change resulting from the dissipation of heat by the human body.  This is shown mathematically below:

Q = mlΔt = lv

In the equation:

  • m: Mass of air (in kg)
  • Δt: Change in temperature (in °C)
  • l: Latent heat of vaporization (in kJ/kg)
  • v: Volume of space (in m³)

The objective of the ventilation system is to ensure adequate air circulation, preventing excessive temperature rise in air-conditioned spaces. This creates an atmosphere in which occupants can live and work comfortably.  In HVAC systems, the removal of heat is a fundamental process crucial for maintaining optimal indoor conditions. Whether it’s expelling excess heat to cool a space or adding heat to counterbalance losses, these systems play a pivotal role in creating a comfortable and controlled environment.

3. Moisture Control – Conquering the Stickiness Challenge

In the realm of HVAC engineering, meticulous attention is devoted to moisture control as a pivotal aspect of ensuring human comfort within enclosed spaces. The human body constantly undergoes moisture exchange, releasing approximately 50 grams of moisture per hour when at rest. HVAC systems play a crucial role in managing this moisture by regulating the relative humidity of the air. As the air’s humidity increases, the body’s capacity to expel heat through evaporation diminishes. This phenomenon not only creates an uncomfortable environment but also poses challenges in maintaining a sense of freshness within enclosed spaces.

The stickiness you feel on your skin is caused by excess humidity levels.
The stickiness you feel on your skin is caused by excess humidity levels. Source: Weather & Radar

Consider a scenario where the air’s humidity is on the higher side. In such conditions, occupants may experience a palpable stickiness on their skin. This sensation arises from the reduced effectiveness of moisture evaporation, leading to a perception of dampness and discomfort. HVAC systems address this issue by actively controlling the relative humidity, ensuring it stays below the 70% threshold. Through advanced technology, these systems regulate the moisture content in the air, creating an environment where occupants experience a pleasant, non-sticky sensation. Achieving optimal moisture control is a testament to the comprehensive capabilities of HVAC systems in enhancing human comfort and well-being.

 

 

4. Air Motion – HVAC Systems Like to Move It Move It

Increased air velocity enhances heat transfer from the body by reducing the thickness of the adjacent air film. This effect leads to increased body heat loss, reducing discomfort in ambient air temperatures lower than the body surface. Conversely, if the air temperature exceeds the body temperature, increased velocity exacerbates discomfort. Moreover, heightened velocity reduces the thickness of the saturated vapor layer near the body, facilitating evaporation. This is particularly advantageous when the dew-point temperature is below 30°C, as the heat loss through evaporation surpasses the heating effect by convection. Recommended air velocity in air-conditioned spaces ranges from 0.04 to 0.12 m/s at 20°C and 0.05 to 0.17 m/s at 22°C.

Proper air distribution, an integral aspect of air conditioning systems, complements air motion by ensuring a uniform supply of air. The combination of controlled air motion and distribution creates a localized cooling sensation known as a draft. This nuanced approach aligns with the requirements of comfort air-conditioning, striving to establish an environment where occupants experience optimal thermal conditions. The interplay between air motion and distribution reflects the commitment of HVAC systems to regulate airflow, prioritizing human comfort through meticulous control of these parameters.  The significance of proper air distribution cannot be overstated, as it complements air motion, creating a localized cooling sensation known as a draft.  To indicate the operating ranges the air velocity and humidity with respect to room air temperature is show in the table below.

Table 4.1 Air Velocity and humidity with respect to room air temperature

Air Velocity and humidity with respect to room air temperature
Room air temp. °C Velocity m/sec R.H.% Minimum R.H.% Maximum
20 0.04 – 0.12 35 65
21 0.04 – 0.14 35 65
22 0.05 – 0.17 35 65
23 0.07 – 0.21 35 65
24 0.09 – 0.24 35 65
25 0.12 – 0.32 35 65
26 0.16 – 0.40 35 65

Regulating air motion is fundamental to HVAC systems, contributing significantly to overall comfort. The systems carefully manage air velocity, striking a balance that enhances heat transfer efficiency without causing discomfort due to excessive airflow. This orchestration, combined with proper air distribution, underscores the commitment of HVAC systems to create an environment aligned with desired comfort parameters, ultimately enhancing the well-being of individuals in the conditioned space.

5. Air Purity – HVAC’s Breath of Fresh Air

The composition of air plays a pivotal role in determining its purity. Elements such as odor, dust, toxic gases, and bacteria are key indicators of air quality. The release of odor through body surface evaporation and the presence of smoke pose significant concerns due to their adverse effects on respiratory organs. Efficiently managing and eliminating toxic gases is crucial to prevent associated irritations. Emphasizing the importance of controlling bacteria, sterilization becomes a paramount measure to safeguard human health in indoor environments.

Air Purifier for Whole House Duct Uv Light Sanitizer Hvac Ac Germicidal Filter UV-C Air Cleaner

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In the realm of HVAC engineering, the quest for optimal indoor comfort extends its dominion into the cold and chilly winter months.  At the core of winter air-conditioning systems lies a meticulously designed network of components, strategically arranged for achieveing the desired thermal control.  Achieving the desired indoor air conditions in winter mirrors the requirements of summer as shown in How Do Air Conditioners Work in Summer? The standard configuration of essential equipment and psychrometric chart below, illustrates the winter air conditioning system. This setup, involves the sequential passage of air through a preheating coil, then a humidifier, and finally a second preheating coil.  As curious HVAC enthusiats, let us delve into the inner workings of these systems, dissecting the components and processes that orchestrate indoor comfort amidst the winter chill.

Winter Air Conditioning System
Winter Air Conditioning System and Psychrometric Chart. Source: Electrical Workbook.

Enhancing Winter Comfort: Double Reheat Coils and Air Washer

In times of severe winter, adjustments are imperative to elevate the Dry Bulb Temperature (DBT) and Relative Humidity (RH) of the air. This can be achieved by adding an air washer and double in reheat coils on a winter airconditiong system.  This is shown in the image below with its corresponding psychrometric representation.  Here, processes such as air mixing (Condition 4), sensible heating (Process 4–5), adiabatic cooling (Process 5–6), and additional sensible heating in the reheat coil (Process 6–1) collectively contribute to cooling, dehumidification, and compensating for heat and vapor losses in the conditioned room. In large systems, the incorporation of re-circulating air fans and supply air fans is common but does not alter the processes outlined in the psychrometric chart.

Air washer and double reheat coils on winter air conditioning system
Air washer and double reheat coils on winter air conditioning system. Source: EIT

Utilizing Outdoor Air Economically: 100% Outdoor Air with Pre-heating

Efficient design of air-conditioning systems mandates the exploitation of internal heat emissions whenever feasible. The system shown below exemplifies the use of waste heat from exhaust for preheating fresh air. As detailed in Audel HVAC Fundamentals, Volume 1: Heating Systems, Furnaces and Boilers  this arrangement employs air washers as humidifying devices, countering moisture losses in the conditioned space while purifying the air. The reheat coil assumes a crucial role in regulating heat supply, thereby controlling the DBT of the air-conditioned space.

Winter air conditioning employing 100% outdoor air with preliminary heating through the utilization of waste heat from the exhaust.
Winter air conditioning employing 100% outdoor air with preliminary heating through the utilization of waste heat from the exhaust. Source: EIT.

Detailed Processes: Preheating, Humidification, and Sensible Heating

Delving into the technical intricacies, Process 4–5 involves preheating fresh air using waste heat from the exhaust. Meanwhile, Process 2–3 signifies the cooling of exhaust air, Process 5–6 orchestrates humidification through steam, and Process 6–1 contributes sensible heating in the reheat coil. Process 1–2 encapsulates the cooling and dehumidification of air, offsetting heat and vapor losses in the conditioned space. Notably, in winter air-conditioning systems requiring heating, the use of outdoor air should be minimized, aligning with principles of energy efficiency and sustainability.

 

Introduction

 
In the previous edition of Engineer Your Finances we looked at 3 Quick Ways for Engineers to Understand Finance & Accounting, in this edition we balance things out by looking at accounting ratios also known as financial ratios.  Financial ratios play a crucial role in assessing the health and performance of a firm. Engineers, accustomed to precision, can leverage these ratios to gain valuable insights into various aspects of financial management. Just as engineers understand the importance of precise measurements in constructing a stable structure, financial ratios, akin to fractions, provide a nuanced understanding of a firm’s financial landscape. Fractions, with their numerator and denominator, represent the delicate balance that engineers seek in their designs. Similarly, financial ratios, with their distinctive components, unveil the proportional health of a company.The value of a financial ratio, much like a critical value in engineering, can indicate whether a business is in a favorable position. For example, in engineering, the safety factor ratio (SF) is used to determine the structural integrity of a design. If SF is less than 1, it signals a potential failure. Similarly, financial ratios below certain thresholds may suggest financial risks or inefficiencies in a business.Live plan

Profitability Ratios

Gross Profit Margin: The gross profit margin is calculated using the formula: (Sales – Cost of Goods Sold) / Sales. It assesses the profitability of a firm’s core activities, excluding fixed costs.

Operating Profit Margin or Return on Sales (ROS): This ratio is calculated as Earnings before Interest and Taxes (EBIT) / Sales. It measures the income a firm generates after deducting costs and expenses from total revenue.

Net Profit Margin: Calculated as Net Profits after taxes / Sales, this ratio provides a measure of overall profitability. It is also referred to as Profit Margin, Net Margin, or Net Profit Ratio.

Return on Investment (ROI ratio or Du Pont ratio): ROI is calculated as Net Income / Total Assets. It indicates the ratio of money gained or lost on an investment relative to the amount invested.

Accounting for Engineers

Liquidity Ratios

Current Ratio: Current Assets / Current Liabilities. This ratio assesses a firm’s ability to pay its debts over the next 12 months by comparing current assets to current liabilities.

Acid-Test Ratio (Quick Ratio): (Current Assets – Inventories) / Current Liabilities. This ratio measures a company’s ability to use quick assets to settle current liabilities immediately.

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Activity Ratios

Activity ratios focus on how quickly a firm converts non-cash assets into cash assets:

Average Collection Period: Accounts Receivable / (Annual Credit Sales / 360 days).

Average Payment Period: Accounts Payable / (Annual Credit Purchases / 360 days).

Inventory Turnover Ratio: Cost of Goods Sold / Average Inventory.

Inventory Conversion Ratio: Inventory Conversion to Cash Period (Days) = 360 days / Inventory Turnover.

 

Debt Ratios

Debt ratios measure a firm’s ability to repay long-term debt and its financial leverage:

Debt Ratio: Total Liabilities / Total Assets.

Debt to Equity Ratio: (Long-term Debt + Value of Leases) / Stockholders’ Equity.

Long-term Debt/Total Asset (LD/TA) Ratio: Long-term Debt / Total Assets.

Times Interest-Earned Ratio: Earnings before Interest and Taxes (EBIT) / Annual Interest Expense.

Overall Coverage Ratio: Cash Inflows / (Lease Expenses + Interest Charges + Debt Repayment / (1-t) + Preferred Dividend / (1-t)).

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Conclusion

Financial ratios serve as powerful tools for engineers-turned-entrepreneurs to navigate the complex landscape of business finance. These ratios, reminiscent of engineering precision, provide a systematic approach to evaluating a company’s financial health. Just as engineers meticulously calculate safety factors for structural stability, entrepreneurs can use financial ratios to gauge the stability and prosperity of their ventures.

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As we wrap up our exploration of financial ratios, remember that each ratio is a piece of the larger puzzle. Just as a well-designed structure requires a careful balance of elements, a successful business demands a holistic understanding of its financial metrics. So, engineer your finances with the same precision you apply to your projects, and build a resilient and prosperous business foundation.

Thank you for joining us in this edition of Engineer Your Finances. Stay tuned for more insights into merging the worlds of engineering and finance, creating a roadmap for your entrepreneurial journey.

 

 

 

Welcome to the first installment of our blog series, “Engineer Your Finances.” In this series, we embark on a journey to demystify the world of financial management through the lens of an engineer. Our goal is to provide you with practical insights that will empower you to navigate the financial terrain with confidence.

Finance can be seen as a complex system much like the engineering projects you’re accustomed to. Understanding the principles of financial management is like deciphering the blueprint of a structure before construction. So, let’s dive into the foundational aspects of financial statements, the pillars of financial understanding.

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Understanding Financial Statements – First Principles

Financial statements are the lifeblood of any business, reflecting its health, performance, and overall well-being. Think of these statements as the technical blueprints for your business, detailing its structure and functionality. In this post, we’ll dissect the basics, understanding the purpose, components, and significance of financial statements.

Imagine a civil engineer examining architectural drawings to ensure a building’s structural integrity. Similarly, we’ll guide you through the essential components of financial statements, allowing you to analyze the financial health of a business like a seasoned engineer inspecting a project’s blueprints.

1. The Dual Aspect Principle: Balancing Act for Engineers

The financial world operates on the dual aspect principle, a fundamental concept that every financial transaction has two sides – assets and equities/liabilities – and they must remain in equilibrium. This principle is akin to the delicate balance engineers strive for ensuring that forces balance – as Newton’s 3rd Law of Motion demands.  We’d actually go as far as saying the dual aspect principle is to accounting what the right hand rule is to engineering!

The balance sheet, a fundamental accounting report, embodies the equation Assets = Equities + Liabilities, serving as a cornerstone for financial understanding. It meticulously records transactions, balancing assets against equities at specific points, exemplified by the year-end snapshot of ABC Pty (Ltd) in 2021 and 2022 below.  More examples cane be found in Financial Decision Making for Engineers Following the dual aspect principle, assets on the left equate to claims on the right. In this balance sheet, assets and equities are classified into current assets, fixed assets, and other categories, offering a minimum detail overview.

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The format aligns with the widely accepted practice of displaying assets on the left and equities on the right. Key categories include current liabilities and shareholders’ equity. The balance sheet’s illustrative example unveils the financial position, showcasing the intricate interplay between assets, equities, and liabilities for insightful analysis, crucial for engineers and technicians navigating financial landscapes.

Balance Sheet for ABC Engineers Pty (Ltd)
As of 31 December 2021
ASSETS AMOUNT (Thousands of Dollars) CLAIMS ON ASSETS AMOUNT (Thousands of Dollars)
CURRENT ASSETS CURRENT LIABILITIES
Cash $52 Accounts payable $87
Accounts receivable $250 Notes payable $110
Marketable securities $175 Accruals $10
Stock $355 Provision for tax $135
Total Current Assets $832 Total Current Liabilities $342
FIXED ASSETS LONG TERM LIABILITIES
Plant & equipment $1610 Mortgages $520
Depreciation -$400 Debentures $200
Net plant & equipment $1210 Total long term liabilities $720
EQUITY
Common stock $600
Retained earnings $380
Total equity (net worth) $980
TOTAL ASSETS $2042 TOTAL CLAIMS ON ASSETS $2042
Balance Sheet for ABC Engineers Pty (Ltd)
As of 31 December 2022
ASSETS AMOUNT (Thousands of Dollars) CLAIMS ON ASSETS AMOUNT (Thousands of Dollars)
CURRENT ASSETS CURRENT LIABILITIES
Cash $50 Accounts payable $60
Accounts receivable $200 Notes payable $100
Marketable securities $150 Accruals $10
Stock $300 Provision for tax $130
Total Current Assets $700 Total Current Liabilities $300
FIXED ASSETS LONG TERM LIABILITIES
Plant & equipment $1800 Mortgages $500
Depreciation -$500 Debentures $200
Net plant & equipment $1300 Total long term liabilities $700
EQUITY
Common stock $600
Retained earnings $400
Total equity (net worth) $1000
TOTAL ASSETS $2000 TOTAL CLAIMS ON ASSETS $2000

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2. Mastering Profit and Loss: A Financial Diagnostic Tool for Your Income

In the realm of financial management, the income statement also known as the profit and loss (P&L) statement serves as a diagnostic tool, providing insights into your business’s fiscal health. Analogous to engineers troubleshooting and diagnosing issues in a complex system, the income statement shows the companies revenues and expenses during a particular period.  It shows how the revenues are transformed into the net income or net profit.

From revenue and expenses to net profit, uncover the story these numbers tell and how they can guide strategic decisions. By the end, you’ll view your P&L as a powerful diagnostic instrument in your financial toolkit, much like the analytical tools an engineer uses to assess the performance of intricate systems.

ABC Pty (Ltd) Income Statement
For the Year Ended December 31, 2021

Revenues Amount (Thousands of Dollars)
Sales 1,200
Other Income 50
Total Revenues 1,250

Expenses
Cost of Goods Sold 800
Operating Expenses 300
Depreciation 50
Interest Expenses 30
Total Expenses 1,180
Net Income 70
ABC Pty (Ltd) Income Statement
For the Year Ended December 31, 2022

RevenuesAmount (Thousands of Dollars)Sales1,500Other Income75Total Revenues1,575

Expenses
Cost of Goods Sold 950
Operating Expenses 400
Depreciation 60
Interest Expenses 100
Total Expenses 1,510
Net Income 65

3. Fluid Dynamics of Money – Cash Flow Statements

As someone which understands the intricacies of fluid dynamics or hydraulics you would be in a good position to under liquidity.  Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.  Cash is the most liquid of assets, while tangible items are less liquid and Cash Flow Statements(CFS) are used to guage a companies liquidity.  Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts.    

In the ABC Pty (Ltd) cash flow statement below, the left-hand column represents all sources of funds during the 2021 financial year, while the right-hand column illustrates how these funds were utilised. The positioning (left/right) of individual items is variable and depends on whether they contributed to or consumed funds. Here are the main things you need to look out for and understand in the cash flow statement:

Sources of funds:

  • Net profit after tax ($120,000): This amount, the final item in the income statement, contributes to the overall funds.
  • Depreciation ($100,000): Obtained from the income statement as well.
  • Decreases in working capital led to additional sources of funds, including:
    • Cash: A reduction from $52,000 to $50,000 indicates a withdrawal of $2,000, serving as a source of funds.
    • Marketable securities: A decrease from $175,000 to $150,000, representing a $25,000 source of funds from the sale of securities.
    • Accounts receivable: A reduction from $250,000 to $200,000 results in a $50,000 transfer from debtors to the company.
    • Stock: Inventory decreased from $355,000 to $300,000, freeing up cash for other uses.

The total source of funds equals net profit after tax + depreciation + total decreases in working capital, totaling $352,000.

Uses of funds:

  • Increases in working capital led to fund disbursement, including:
    • Accounts payable: A reduction from $87,000 to $60,000 indicates a repayment of $27,000 to creditors.
    • Notes payable: Reduced from $110,000 to $100,000, resulting in a $10,000 repayment to the bank.
    • Income tax: A decrease from $135,000 to $130,000 means a $5,000 payment to the Tax Office to reduce tax liability.
    • Reduction in long-term debt: Mortgages reduced from $520,000 to $500,000, resulting in a $20,000 payment to the mortgagor.
    • Gross fixed asset expansion: An increase from $1,610,000 to $1,800,000 indicates a $190,000 expenditure on acquiring assets.
    • Dividends to shareholders: Of the $120,000 net profit after tax, only $20,000 was retained, with the remaining $100,000 disbursed as dividends.

The total use of funds amounts to $352,000, aligning with the total source of funds.

ABC Pty (Ltd) Cash Flow Statement
For the Period from December 31, 2020, to December 31, 2021

Sources of Funds Amount (Thousands of Dollars)
Net Profit After Tax 120,000
Increases in Working Capital
Depreciation 100,000
Accounts Payable 27,000
Notes Payable 10,000
Income Tax 5,000
Cash 2,000
Marketable Securities 25,000
Total Increases in Working Capital 42,000
Reduction in Long Term Debt 20,000
Gross Fixed Asset Expansion 190,000
Total Decreases in Working Capital 132,000
Dividends to Shareholders 100,000
Total Sources of Funds 352,000

Uses of Funds Amount (Thousands of Dollars)
Decreases in Working Capital
Accounts Receivable 50,000
Stock 55,000
Total Decreases in Working Capital 105,000
Dividends to Shareholders 100,000
Total Uses of Funds 205,000

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Conclusion

In conclusion, our exploration of financial concepts draws parallels with the precision of engineering blueprints, emphasizing the importance of equilibrium. From the foundational equation Assets = Equities + Liabilities to the nuanced interplay of balance sheets, income statements, and cash flow statements, we’ve navigated the financial landscape. The analogy between financial planning and engineering principles, particularly the application of the right-hand rule, underscores the need for meticulous balance to ensure stability.

Specifically, in understanding cash flow statements, we likened financial sources and uses to the carefully orchestrated forces in engineering. Much like engineers balance forces for structural integrity, businesses must judiciously manage their sources and uses of funds for sustained financial health. As we conclude, embrace this equilibrium, strategically apply financial principles, and steer your business toward resilience and prosperity.  Below are some books that can assist you on your way to understanding finance and accounting as an engineer, technician or technical professional.

Financial Decision-Making for Engineers Finance for Engineers: Evaluation and Funding of Capital Projects Construction Accounting and Financial Management (What’s New in Trades & Technology) American Mine Accounting: Methods and Forms Employed by Leading Mining Companies Finance for Non-Finance: An Introduction for Engineers