To manage a business profitably, you need to know the language of business. And that language is Finance.
When you need to make the business grow, and your ability to get the money flowing in the system matters, here are 7 practical finance tips you must know to start speaking this language of business and win over your boss:
- Measure business results correctly; the incomes of an activity should be matched with the costs of that activity. Do not make the mistake of counting income in one period and expenses in another; else what you will get is a distorted result.
- Differentiate between Profit and Cash; they are not the same things. Accounting can make you see profits. That does not necessarily mean that you have also got cash. What is needed for long term sustenance is real hard cash.
- Learn to budget. Budgeting is one of the most important financial exercises. It helps you see how your business strategy will finally earn money and what costs will be necessary to earn them. In large organizations especially, a budget helps to direct scarce business resources to the most optimum use.
- Understand that Costs are facts – they happen. Revenues are fiction – there is no certainty that they will come. Hence, it is important to understand the facts – costs. Understand the costs that go into doing business and how can you best manage them to produce maximum results.
- Understand key ratios – they will help you get an eagle’s eye view of where the business is going. Some of the most important ratios are EBITDA, Break Even, Contribution, Gross Profit Ratio, Liquidity, Interest Margin, etc.
- Business needs capital. Promoters/owners contribute equity money or they can go to lending institutions to raise debt. Now debt has a fixed interest cost to be paid. What about equity? Is it free? Remember that there is also a cost of equity?
- You don’t have to be an accountant to know finance. Let the accountants handle the debits and credits. You should only know how to use the information produced by accountants to make business decisions.
The more knowledge you have about the financials of a business, the more likely you are to get the business going in the right direction. Make greater sense of financial terms and use the language of business to talk confidently to your boss or even the person holding the position of CFO!
About the Author:
Vipin Khandelwal is an entrepreneur, a discoverer, a voracious reader. He is constantly evaluating ways to enable learning in innovative ways. Before entrepreneurship, he was involved in doing business and financial analysis and headed a financial planning services firm. Some of the courses run by Vipin Khandelwal, Learning Infinite are:
Download this FREE Finance e-Guide from Learning Infinite – How to talk confidently to your CFO?