{
  "id": 39299,
  "date": "2021-05-29T22:10:32",
  "date_gmt": "2021-05-29T22:10:32",
  "guid": { "rendered": "https:\/\/finance-able.com\/?p=39299" },
  "modified": "2021-11-09T01:00:39",
  "modified_gmt": "2021-11-09T06:00:39",
  "slug": "learn-finance-foundational-framework",
  "status": "publish",
  "type": "post",
  "link": "https:\/\/finance-able.com\/learn-finance-foundational-framework\/",
  "title": {
    "rendered": "Learn Finance ASAP #1 – The Foundational Framework"
  },
  "content": {
    "rendered": "\n<p>Learn finance easily with a dynamic <strong>Mental Model <\/strong>that ties together core finance concepts like <strong>Business Valuation<\/strong> and <strong>Returns Analysis<\/strong>. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-tl-dr\"><strong>TL;DR<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\" type=\"1\" id=\"block-901eab75-0220-4241-af1d-5c852c23b56d\"><li>You can shortcut your Finance learning with <strong>Mental Models<\/strong> that tie together multiple concepts.<\/li><li>Two of the most common questions asked in Finance are: <strong>(1) &#8220;What&#8217;s the Business worth?&#8221; <\/strong>and <strong>(2) &#8220;Are we generating an attractive return?<\/strong>&#8220;.<\/li><li>The common threads behind all Cash Flow Generating Assets (or <strong>CFGAs<\/strong>) are: (1) <strong>Purchased with Cash<\/strong>, (2) <strong>Generate Cash Flow <\/strong>for the Owner, and (3) <strong>Sold for Cash<\/strong>.<\/li><li>Your <strong>House <\/strong>and a <strong>Business <\/strong>are both <strong>CFGAs<\/strong> and understanding this equivalency forms the basis of a powerful <strong>Mental Model<\/strong> that helps you answer a wide variety of Finance questions. <\/li><\/ul>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-columns containerwidth is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:100%\">\n<div class=\"wp-block-kadence-rowlayout alignnone\"><div id=\"kt-layout-id_f1b74f-15\" class=\"kt-row-layout-inner kt-layout-id_f1b74f-15\"><div class=\"kt-row-column-wrap kt-has-1-columns kt-gutter-default kt-v-gutter-default kt-row-valign-top kt-row-layout-equal kt-tab-layout-inherit kt-m-colapse-left-to-right kt-mobile-layout-row\">\n<div class=\"wp-block-kadence-column inner-column-1 kadence-column_24b4c1-6d\"><div class=\"kt-inside-inner-col\" style=\"background:#f4f4f4\">\n<h2 class=\"wp-block-heading\" id=\"h-want-to-learn-more-about-finance\" style=\"font-size:35px\"><strong>Want To Learn More About Finance?<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18px\"><strong>Check out all of our (free) deep-dive articles in our<\/strong> <a href=\"https:\/\/finance-able.com\/analyst-starter-kit\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Analyst Starter Kit<\/span><\/strong><\/a>:<\/p>\n\n\n<div class=\" wp-block-kadence-portfoliogrid kb-blocks-portfolio-loop-block alignnone kb-portfolio-loop_a61d19-2f kb-portfolio-grid-layout-carousel kt-blocks-carousel \"><div class=\" kb-portfolio-grid-layout-carousel-wrap kt-post-grid-layout-carousel-wrap kt-carousel-arrowstyle-whiteondark kt-carousel-dotstyle-dark splide kb-blocks-portfolio-img-hover-zoomout kb-blocks-portfolio-content-hover-zoomin\" data-columns-xxl=\"3\" data-columns-xl=\"3\" data-columns-md=\"3\" data-columns-sm=\"2\" data-columns-xs=\"1\" data-columns-ss=\"1\" data-slider-center-mode=\"false\" data-slider-type=\"carousel\" data-slider-anim-speed=\"400\" data-slider-scroll=\"1\" data-slider-dots=\"true\" data-slider-arrows=\"true\" data-slider-hover-pause=\"false\" data-slider-auto=\"true\" data-slider-center-mode=\"false\" data-slider-speed=\"7000\" data-show-pause-button=\"false\" data-slider-gap=\"30\" data-slider-gap-tablet=\"30\" data-slider-gap-mobile=\"30\" data-slider-gap-unit=\"px\" data-item-selector=\".kb-portfolio-masonry-item\"><div class=\"kadence-splide-slider-init splide__track\"><ul><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"An image of a lightbulb with the text Unlevered Beta Formula\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/unlevered-beta-formula\/\" aria-label=\"Unlevered Beta Formula &#8211; Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Unlevered Beta Formula &#8211; Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"A lightbulb and the words Purchase Price Allocation\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/purchase-price-allocation\/\" aria-label=\"Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:45.138888888889%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"720\" height=\"325\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png\" class=\"attachment-large size-large wp-post-image\" alt=\": A stick figure answering an interview question with the title text &#039;Walk Me Through an LBO&#039; below\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png 720w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-300x135.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-400x181.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-624x282.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-50x23.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-100x45.png 100w\" sizes=\"auto, (max-width: 720px) 100vw, 720px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" aria-label=\"Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><\/ul><\/div><div class=\"clearfix\" style=\"clear:both\"><\/div><\/div><\/div><\/div><\/div>\n<\/div><\/div><\/div>\n\n\n\n<div style=\"height:82px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p><\/p>\n<\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-learn-finance-quickly-not-in-10-years\"><strong>Learn Finance Quickly\u2026Not in 10 Years!<\/strong><\/h2>\n\n\n\n<p><strong>What if I were to tell you that you could shortcut 10 years of learning about Finance by reading just a few articles? Would you be interested?<\/strong><\/p>\n\n\n\n<p>In this article series, you can do just that! <\/p>\n\n\n\n<p>I&#8217;ve had the unique privilege of seeing my own struggles as an <strong>Investment Banking<\/strong>, <strong>Private Equity<\/strong>, and <strong>Hedge Fund <\/strong>professional as well as the struggles of <strong>thousands of students<\/strong> I&#8217;ve taught who were aiming for top-tier Finance jobs. <\/p>\n\n\n\n<p>Through those experiences, I&#8217;ve repeatedly witnessed the <strong>common stumbling blocks<\/strong> students face when learning core Finance concepts. <\/p>\n\n\n\n<p>In my experience, the core issue is that students learn Finance as a set of independent concepts, but <strong>students often lack a unifying conceptual framework<\/strong>. <\/p>\n\n\n\n<p>Over the course of most <strong>Finance<\/strong> professionals&#8217; careers, they end up distilling their understanding into the same framework we&#8217;re about to learn here&#8230;but it usually takes the better part of a decade! <\/p>\n\n\n\n<p>Read ahead to save yourself a bunch of time!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-learn-finance-faster-with-mental-models\"><strong>Learn Finance Faster With Mental Models<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-1024x576.jpg\" alt=\"Students who Learn Finance With and Without Mental Models\" class=\"wp-image-39338\" width=\"750\" height=\"421\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-1024x576.jpg 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-300x169.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-768x432.jpg 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-400x225.jpg 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-624x351.jpg 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-50x28.jpg 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK-100x56.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Your-House-is-a-Business-v5-MK.jpg 1280w\" sizes=\"auto, (max-width: 750px) 100vw, 750px\" \/><\/figure>\n\n\n\n<p>At my company <a href=\"https:\/\/finance-able.com\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Finance|able<\/span><\/strong><\/a>, we place a heavy emphasis on learning mental frameworks (i.e. <strong>Mental Models<\/strong>) that tie together seemingly disparate concepts that can be applied across a variety of situations. <\/p>\n\n\n\n<p>When my past students have internalized these frameworks, they have a much easier time tackling tough problems both in interviews and on the job. <\/p>\n\n\n\n<p>A title for this series I considered was&#8230;<strong><em>&#8220;How I wish someone had explained finance to me early in my career!&#8221;<\/em><\/strong> <\/p>\n\n\n\n<p>But in the end, the title doesn&#8217;t matter as long as I can help you save a TON of time in your learning journey. Let&#8217;s hop in!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-core-questions-of-finance-valuation-and-returns\"><strong>The Core Questions of Finance: Valuation and Returns<\/strong><\/h2>\n\n\n\n<p>There are many questions you&#8217;ll be asked during a career in Finance. However, a significant proportion of them boil down to two root-level questions: <\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>What is this business worth? <\/strong><\/li><li><strong>Are we generating an attractive return on our investment?<\/strong><\/li><\/ol>\n\n\n\n<p>The formal names you&#8217;ll hear for these two questions are business <strong>Valuation<\/strong> and investment <strong>Returns Analysis<\/strong>. <\/p>\n\n\n\n<p>There&#8217;s a good chance you&#8217;ve come across terms like <strong><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Discounted Cash Flow Analysis<\/span><\/a><\/strong>, <strong>Internal Rate of Return<\/strong>, and so on. <\/p>\n\n\n\n<p>We&#8217;re going to avoid these fancy terms and just keep it simple, so we can learn Finance without inordinate confusion at the outset of our journey. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-mental-model-introduction-your-house-as-a-business\"><strong>Mental Model Introduction: Your House&#8230;as a Business<\/strong><\/h2>\n\n\n\n<p>Take a second and put yourself in the shoes of a business owner. <\/p>\n\n\n\n<p><strong>Let&#8217;s say you started a thriving business and someone offers to buy it. How do you know what it&#8217;s worth?  <\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-1024x576.jpg\" alt=\"Buyer offering to purchase a business and the business owner needs to learn finance \" class=\"wp-image-39346\" width=\"750\" height=\"421\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-1024x576.jpg 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-300x169.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-768x432.jpg 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-400x225.jpg 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-624x351.jpg 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-50x28.jpg 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy-100x56.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/Offer-to-Buy.jpg 1280w\" sizes=\"auto, (max-width: 750px) 100vw, 750px\" \/><\/figure>\n\n\n\n<p>In the first part of this article series, we&#8217;ll provide a foundational model for tackling this question. We&#8217;ll then explain how to assess whether your business offers a good return on your investment in later articles in this series. <\/p>\n\n\n\n<p>To get us started, we&#8217;ll illustrate how the <strong>House <\/strong>you live in is a <strong>Business<\/strong>.  <\/p>\n\n\n\n<p>In fact, your <strong>House <\/strong>is a great mental anchor for how <strong>Businesses <\/strong>work, for how <strong>Business Valuation <\/strong>works, and for assessing investment <strong>Returns<\/strong>. <\/p>\n\n\n\n<p>As we&#8217;ll see, at a root level, <strong>Cash <\/strong>(and <strong>Cash Flow<\/strong>) is what ties both <strong>Houses<\/strong> and <strong>Businesses <\/strong>together. <strong>Cash Flow <\/strong>also forms the basis for this <strong>Mental Model<\/strong>. <\/p>\n\n\n\n<p>To fully tie together our <strong>Mental Model<\/strong>, we&#8217;ll eventually show how your <strong>House<\/strong>, <strong>Businesses<\/strong>, <strong>Bonds<\/strong>, and <strong>Stocks <\/strong>have the same underlying mechanics in future article in this series.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-cash-and-cash-flow-are-the-core\"><strong>Cash (and Cash Flow) Are the Core<\/strong><\/h2>\n\n\n\n<p>Let\u2019s start with the <strong><em>idea<\/em><\/strong> of a <strong>&#8216;Business&#8217;<\/strong> at the most basic level. <\/p>\n\n\n\n<p>With any <strong>Business<\/strong>, you begin by buying a <strong>Business <\/strong>at a certain price (or for a start-up, you buy the items that will become your <strong>Business<\/strong>). <\/p>\n\n\n\n<p>You then receive <strong>Cash Flows <\/strong>from that <strong>Business<\/strong>, which accrue to you as the Owner. <\/p>\n\n\n\n<p>At some point down the road, you can sell the <strong>Business <\/strong>(hopefully at a value higher than the initial purchase price!) and make a profit (or &#8216;<strong>Gain<\/strong>&#8216;) from the sale.<\/p>\n\n\n\n<p>In <em>finance-speak, <\/em>a <strong>Business<\/strong> is a <strong>Cash Flow Generating Asset<\/strong> (let\u2019s just call them <strong>&#8216;CFGAs&#8217;<\/strong>). <\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-the-3-core-characteristics-of-cfga-s\"><strong>The 3 Core Characteristics of CFGA&#8217;s<\/strong><\/h3>\n\n\n\n<p>As we&#8217;ll see shortly, Houses are also <strong>CFGAs<\/strong>. <\/p>\n\n\n\n<p>What ties <strong><span style=\"text-decoration: underline;\">ALL<\/span><\/strong> <strong>CFGAs<\/strong> together is that they have the following <strong>3 Core Characteristics<\/strong>: <\/p>\n\n\n\n<ol class=\"wp-block-list\" type=\"1\" id=\"block-e33364ec-9fb0-44de-9411-3a170dc671d8\"><li><strong><span style=\"text-decoration: underline;\">Cash<\/span> <\/strong>is used to <strong><span style=\"text-decoration: underline;\">Buy<\/span> <\/strong>the Asset.<\/li><li>The Asset generates <span style=\"text-decoration: underline;\"><strong>Cash Flow<\/strong><\/span> that accrues to the Owner, which generates a <strong>Return<\/strong> (or <strong>&#8216;Yield&#8217;<\/strong>).<\/li><li>The Asset can be <span style=\"text-decoration: underline;\"><strong>Sold<\/strong><\/span> for <span style=\"text-decoration: underline;\"><strong>Cash<\/strong><\/span>, which creates a <strong>Gain <\/strong>or <strong>Loss<\/strong> for the Owner when they sell.<\/li><\/ol>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-1024x576.jpg\" alt=\"3 Criteria for Cash Flow Generating Asset\" class=\"wp-image-39350\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-1024x576.jpg 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-300x169.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-768x432.jpg 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-400x225.jpg 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-624x351.jpg 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-50x28.jpg 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1-100x56.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/CFGA-Test-1.jpg 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>In short, <span style=\"text-decoration: underline;\"><strong>Cash<\/strong><\/span> is central to everything! <\/p>\n\n\n\n<p>Understanding that <strong>Cash <\/strong>(and <strong>Cash Flow<\/strong>) underlie all <strong>CFGA&#8217;s<\/strong> will help you to learn <strong>Finance<\/strong> much more effectively as you&#8217;ll see shortly.<\/p>\n\n\n\n<p>For now, let&#8217;s see if we can apply these same <strong>3 Core Characteristics<\/strong> of <strong>CFGAs<\/strong> to the <strong>House<\/strong> you live in. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-your-house-as-a-business\"><strong>Your House as a Business<\/strong><\/h2>\n\n\n\n<p>People don\u2019t usually think of their house as a &#8216;Business&#8217;, but it really is. All you have to do is rent out your house and it becomes a &#8216;<strong>Business<\/strong>&#8216;. <\/p>\n\n\n\n<p>Let\u2019s have a look at how the <strong>3 Core Characteristics<\/strong> we mentioned above apply to your <strong>House<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-core-characteristic-1-can-purchase-in-cash\"><strong>Core Characteristic #1: Can Purchase in Cash<\/strong><\/h3>\n\n\n\n<p>To buy a House, you have to pay a <strong>Purchase Price<\/strong> (\u2713) in <strong>Cash<\/strong>. This payment makes you the Owner of that <strong>House<\/strong>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-core-characteristic-2-generates-cash-flow-for-the-owner\"><strong>Core Characteristic #2: Generates Cash Flow for the Owner<\/strong><\/h3>\n\n\n\n<p>You then rent the <strong>House<\/strong> out and collect rental payments. You also have to pay any expenses to maintain the house (e.g. maintenance, lawn care, garden care, etc.). <\/p>\n\n\n\n<p>The profit generated every month creates <strong><a href=\"https:\/\/www.investopedia.com\/terms\/c\/cashflow.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Cash Flow<\/span><\/a><\/strong> (\u2713) that accrues to you as the Owner. <\/p>\n\n\n\n<p>That Cash Flow earned creates an annual <strong>Return<\/strong> (or <strong><a href=\"https:\/\/www.investopedia.com\/terms\/y\/yield.asp\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Yield<\/span><\/a><\/strong>) on your investment. <\/p>\n\n\n\n<p>We could go way down the rabbit hole on <strong>Yield<\/strong>. But, for now, just think of <strong>Yield<\/strong> as the cash generated within a period divided by your original investment. <\/p>\n\n\n\n<p>So, if you buy a house for $100 and it generates $10 per year of <strong>Cash Flow<\/strong>, your <strong>Yield<\/strong> is <strong>10%<\/strong> (<strong>$10 Cash Flow \/ $100 Investment<\/strong>).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-core-characteristic-3-can-sell-for-cash\"><strong>Core Characteristic #3: Can Sell For Cash<\/strong><\/h3>\n\n\n\n<p>After a while, let&#8217;s say you decide to go travel the world. <\/p>\n\n\n\n<p>To fund the trip, you decide to <strong>Sell <\/strong>(\u2713) your property to raise some <strong>Cash<\/strong>. <\/p>\n\n\n\n<p>If you\u2019re lucky, your <strong>House <\/strong>will increase (or <strong>&#8216;Appreciate&#8217;<\/strong>) in value relative to your initial purchase price. In that case, you\u2019ll be able to sell the house for a higher price than what you originally paid. At the time of the sale, you would generate a <strong>&#8216;Gain&#8217;<\/strong>!<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/03\/mental-model-house-business-stock-bond_Slide-2_gif.gif\" alt=\"GIF showing the Buy - Rent - Sell process of a House\" class=\"wp-image-35954\"\/><\/figure><\/div>\n\n\n\n<p>If you aren&#8217;t so lucky, the value of your House might decline (or <strong>&#8216;Depreciate&#8217;<\/strong>) in value. In that case, you would generate a <strong>Loss<\/strong>&#8230;and might need to change your travel plans!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-your-house-vs-a-traditional-business\"><strong>Your House vs a \u2018<em>Traditional<\/em>\u2019 Business<\/strong><\/h2>\n\n\n\n<p>Let&#8217;s say that instead of a House, you decide to buy a local pizza parlor <strong>Business<\/strong>. <\/p>\n\n\n\n<p>Let&#8217;s now see if a <strong>Business<\/strong> also exhibits the <strong>3 Core Characteristics<\/strong> of <strong>CFGAs<\/strong>. <\/p>\n\n\n\n<p>You\u2019d start the process by paying the <strong>Purchase Price<\/strong> (\u2713), likely in <strong>Cash<\/strong>, to buy the business. In the Finance world, we would say you paid for the <strong><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.forbes.com\/sites\/investopedia\/2012\/11\/15\/using-enterprise-value-to-compare-companies\/?sh=316efede53a2\" target=\"_blank\" rel=\"noreferrer noopener\">&#8216;Enterprise Value&#8217;<\/a><\/span><\/strong> of the Business&#8230;which is just a fancy term for the Purchase Price of the <span style=\"text-decoration: underline;\"><strong>entire<\/strong><\/span> business.<\/p>\n\n\n\n<p>As people come in and enjoy your pizza, the money you generate (minus your expenses) creates <strong>Cash Flow<\/strong> (\u2713). <\/p>\n\n\n\n<p>This <strong>Cash Flow<\/strong> accrues to you as the Owner. Similar to the <strong>House<\/strong> example, the <strong>Cash Flow<\/strong> generates a return (or <strong>Yield<\/strong>) on your investment.<\/p>\n\n\n\n<p>Finally, selling a traditional <strong>Business <\/strong>is similar to selling a <strong>House<\/strong>. <\/p>\n\n\n\n<p>If the value of your business has grown, then buyers will be willing to pay a higher price (or<strong> Enterprise Value<\/strong>) at <strong>Sale<\/strong>. <\/p>\n\n\n\n<p>As a result, you\u2019ll generate a <strong>Gain<\/strong> upon the <strong>Sale <\/strong>(\u2713) of the <strong>Business<\/strong>. If you sold the <strong>Business <\/strong>at a lower price than what you originally paid, you would generate a <strong>Loss<\/strong>. <\/p>\n\n\n\n<p>In short, a <strong>Business <\/strong>exhibits exactly the same <strong>3 Core Characteristics<\/strong> of <strong>CFGAs<\/strong> as a <strong>House<\/strong>.<\/p>\n\n\n\n<p>In the next two articles in this series, we&#8217;ll explore <strong>Business Valuation <\/strong>in detail to see what could make the sale price higher or lower.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1920\" height=\"1080\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/03\/Animated-Slide-3.gif\" alt=\"GIF showing the Buy - Transactions - Sell process of a Business\" class=\"wp-image-35964\"\/><\/figure><\/div>\n\n\n\n<div style=\"height:33px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-a-house-is-a-business-so-what\"><strong>A House is a Business&#8230;So What?<\/strong><\/h2>\n\n\n\n<p>So, we can now see that both <strong>Houses<\/strong> and <strong>Businesses <\/strong>share the same <strong>3 Core Characteristics<\/strong> of <strong>CFGAs<\/strong>. <\/p>\n\n\n\n<p>Understanding the common threads that tie together <strong>Houses <\/strong>and <strong>Businesses <\/strong>as <strong>CFGA&#8217;s<\/strong> forms the foundation of the <strong>Mental Model<\/strong> that we will build out over the remainder of this article series. <\/p>\n\n\n\n<p>It will help you to navigate more complex topics like <strong>Business Valuation <\/strong>and <strong>Returns Analysis <\/strong>with ease! <\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-1024x576.jpg\" alt=\"House is the Best Mental anchor to Learn Finance.\" class=\"wp-image-39355\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-1024x576.jpg 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-300x169.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-768x432.jpg 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-400x225.jpg 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-624x351.jpg 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-50x28.jpg 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor-100x56.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/05\/House-is-Best-Anchor.jpg 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Further, we now have a familiar <strong>Mental Anchor<\/strong> (a <strong>House<\/strong>) to refer back to when analyzing <strong>Businesses<\/strong>. <\/p>\n\n\n\n<p>It&#8217;s easy to get deep into the weeds when you first learn <strong>Finance <\/strong>concepts and get totally lost, but this can help bring you back from the abyss. \ud83d\ude42  <\/p>\n\n\n\n<p>In the next article, we&#8217;ll learn how future <strong>Cash Flows <\/strong>are the basis for nearly all <strong>Business Valuation<\/strong>. In the meantime, let us know if you have any comments or questions below.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p><strong><span style=\"text-decoration: underline;\">Quick Note<\/span>:<\/strong> If you&#8217;ve enjoyed this article and are aiming for a career in Finance, check out our <a href=\"https:\/\/finance-able.com\/buyside-vs-sellside\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>World of Finance: Buyside vs Sellside<\/strong><\/span><\/a> article and explainer video to learn more about how <strong>Investment Banks<\/strong>, <strong>Private Equity Funds<\/strong>, and <strong>Hedge Funds<\/strong> work.<\/p>\n\n\n\n<p><\/p>\n<style class=\"advgb-styles-renderer\">#kt-layout-id_f1b74f-15 > .kt-row-column-wrap{align-content:start;}:where(#kt-layout-id_f1b74f-15 > .kt-row-column-wrap) > .wp-block-kadence-column{justify-content:start;}#kt-layout-id_f1b74f-15 > .kt-row-column-wrap{column-gap:var(--global-kb-gap-md, 2rem);row-gap:var(--global-kb-gap-md, 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    "rendered": "<p>Learn finance easily with a dynamic Mental Model that ties together core finance concepts like Business Valuation and Returns Analysis. TL;DR You can shortcut your Finance learning with Mental Models that tie together multiple concepts. Two of the most common questions asked in Finance are: (1) &#8220;What&#8217;s the Business worth?&#8221; and (2) &#8220;Are we generating&#8230;<\/p>\n",
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  "yoast_head": "<!-- This site is optimized with the Yoast SEO Premium plugin v27.2 (Yoast SEO v27.2) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Learn Finance ASAP #1 - The Foundational Framework<\/title>\n<meta name=\"description\" content=\"Learn Finance faster! No prior background needed. Quickly master concepts like business Valuation for Interviews with our proven approach.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/finance-able.com\/learn-finance-foundational-framework\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Learn Finance ASAP #1 - The Foundational Framework\" \/>\n<meta property=\"og:description\" content=\"Learn Finance faster! 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