5 reasons why EVERYONE should understand Financial Management
by Gareth Cotten on 11/11/10 at 7:53 am
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1. Understanding financial jargon
With the recent recession hitting everybody where it hurts, people have come to realise that they weren’t following what was going on around them. In a major part, this was because people didn’t understand the lingo being used, and couldn’t decipher the warning signs for themselves. Wrapping your head around the jargon of the financial world not only makes you a better dinner party guest, but a more informed world citizen.
Perfect for:
- Everyday Joe: finances are an unavoidable part of everyone’s lives, whether they like it or not. Learn to know when “advisors” are working in your best interests, or their own.
- Business owners and entrepreneurs: if you’re standing at a networking event, or chatting to a client, and the conversation is clearly above your head, do you think that would inspire people to do business with you?
2. Reading financial statements
When you know what you’re looking for, financial statements aren’t nearly as intimidating as most people think. These reports have the ability to give an overall picture of a business in an absolutely uniform format – allowing you to get real insight into what makes a particular business tick.
Perfect for:
- Aspirant billionaire investors: you wouldn’t invest in a business if you didn’t understand it, would you?
- Sales people: imagine how much more effective you could be if you had an up-to-date picture of your client and how they’ve been performing?
- Business owners and entrepreneurs: you might trust your bookkeeper or accountant to put your numbers together for you, but do you know if what they’ve presented you is a true reflection of reality?
3. Appreciating the time value of money
An unassailable truth is that a rand today is worth more than a rand tomorrow. Too many companies and individuals make the mistake of letting others hold onto their money, and it’s costing them dearly. Whether you want to get a clearer picture of what is takes to plan for retirement, or feel you should be paid by your clients faster, the time value of money is integral.
Perfect for:
- Everyday Joe: if you ever take out a loan for anything, the time value of money comes into play in a big way.
- Marketing people: convincing your clients to pay faster puts your company miles ahead of its competitors.
- Operations people: use the knowledge gained here to get the best efficiencies out of your equipment, employees and suppliers.
4. Better profit planning and control
It might seem a backward thought, but did you know that it’s often the case that producing and selling fewer products can make you more money than selling more? Profit planning helps to chart the most efficient and effective volumes for your business or service, by looking at your input costs, sales prices and margins. Knowing what helps, and hurts, your profits is the fastest way to take your business or division to new heights.
Perfect for:
- Line/department managers: learn how to track and monitor input costs, revenues, and margins. Tweak them correctly, and watch your unit take off!
- Marketing people: pitching your product or service at the right price is absolutely critical to success. Knowing how much is enough for your business, and how much is too much for your clients, helps you to narrow the range you have to work in.
- Business owners and entrepreneurs: you know you’re making a profit, but where are you making it? Identifying your winners and losers could be the difference between staying a mom-and-pop operation and going Fortune 500.
- Operations people: are you running operations in the most cost-effective way? Should you be giving priority to a different product or service?
- HR practitioners: recruiting and managing the right people is imperative once you’ve identified which parts of the business create the most value.
5. Managing cash flow better
Cash flow is the lifeblood of any business, and anybody who disagrees will be out of business soon enough. Setting budgets, knowing your expenditure patterns, and getting cash in from customers are often not people’s strong points. But disregarding these vital activities is signing your business’s death warrant. So get on top of your cash flow, before it gets on top of you.
Perfect for:
- Account managers: knowing why you have to keep the lines of communication open with your clients is paramount when it comes to payment time.
- Business owners and entrepreneurs: this is too often the area that brings down an otherwise healthy business. Ignore it at your peril.
- Debtor’s clerks: know the value of your role in keeping your employer afloat.
- Self-employed professionals: there are plenty of doctors, accountants, lawyers and engineers out there who work themselves to the bone, only to be living off scraps. Don’t be one of them.
Gareth Cotten is one of the growing breed of SA entrepreneurs with that ‘world-domination’ look in his eyes. Gareth runs the coaching and consulting practice 'Good Advice'. Gareth is also the 'course convener' for the University of Cape Town (Law@Work) Start and Manage a Small Business course and the University of Cape Town Basics of Financial Management course. View more articles by Gareth Cotten.
Tags: Business/Finance, finance, Financial Planning, small business finance
