Businesses operate on the science of money. Finance is known as the science of managing that money. Finance guides companies through the labyrinth that is financial or money management. It accomplishes this through well-defined frameworks and reporting structures. Additionally, it can fuel daily operations and projects’ progress and ensure enhanced financial performance through compliance with a list of rules and regulations.
After the onset of globalization, as businesses began to expand and money started circulating to the world’s remotest corners, finance grew vastly. Basic knowledge of financial concepts plays a pivotal role in formulating better executive business decisions. What if you don’t have the necessary financial expertise, or what if your organizational role is strictly non-financial? Still, to cooperate with the rest of the company, you must understand financial management’s fundamentals. As a result, you can make firsthand contributions in deciding your business strategy and have an informed, more detailed view of your business’s performance.
For non-finance managers, a firm grip on finance makes them more efficient in handling their company’s day-to-day financial aspects. It can lead to improved decision-making and a deeper understanding of a company’s financial reports.
To supply this growing demand for financial knowledge, most esteemed institutions are now offering a university short course in finance basics for non-finance professionals. These courses’ unique design lets the learner grasp the intricacies of finance with ease and from scratch.
Let this article be your comprehensive guide and starting point to understanding finance’s significance, central concepts, and elements.
Understanding the Key Performance Indicators (KPIs)
KPIs, mainly financial KPIs, are critical measures of company performance for the senior management. Managers equipped with financial knowledge would be better equipped to create KPIs that boost their business’s growth and worldwide expansion. Non-finance managers/executives should at least have a firm idea about the following financial aspects of business:
- Financing leverage, debt options
- Project evaluation
- Financial statement analysis
- Audits and Budgeting
- Financial forecasting
- Financial tools for strategic investment decisions
Let’s go over some key financial concepts that can help you better fulfill your non-financial duties and roles.
Essential Concepts in Business Finance
The balance sheet is a summary of a company’s various financial accounts. This financial statement lets executives glimpse into their company’s financial strength and capacity at a specific point in time. An organization’s balance sheet indicates whether it has enough funds in its reserves to meet its annual targets. The balance sheet provides a round-up of company assets, liabilities, and equity on a sheet.
Assets are known as a business’ possessions. Assets can be tangible, such as land and equipment, or intangible, such as copyrights or patents. In comparison, liabilities comprise a business’ short-term or long-term debts to other companies, banks, or individuals. For instance, accrued payment to suppliers, equipment on lease, and bank overdraft.
Equity is yet another essential component of the balance sheet. Shareholder’s equity consists of a company’s capital stock and retained earnings. Having a comprehensive knowledge of assets, liabilities, and capital structure can direct a manager to make financially sound decisions and create budgets, investments, and future forecasts.
Profit and Loss Statement
Regardless of the market, industry, or hierarchy, businesses exist to maximize profit. If a company doesn’t generate enough profit or lacks gains, it will eventually become solvent. The main reason why companies shut down operations or sell their assets is losses outweighing profits or the inability to surpass the break-even point. A break-even point exists where the unit costs of a product are equivalent to the revenue it generates. Often, many organizations would dedicate countless resources and time to generate funding from outside sources. They do this to ensure their daily operations are disruption-free, and the business continues as a going concern.
Profit and loss statements concern the total losses and profits a company bears during a specific fiscal period and can offer an insight into your business’s performance. Typically, these statements cover the most recent accounting period, which may sometimes pertain to a whole financial year. Profit and loss statements record and analyze critical financial information like total sales, total operating expenses, and the organization’s net/gross profit and loss.
Budgeting stands as equal to financial statement analysis in terms of importance. Budgets allow managers to have more substantial control over their company’s affairs. In the strategic running of an organization, budget forecasting is essential to devise relevant and timely strategies. Budgeting allows business professionals to manage and allocate their resources effectively.
Breaking down individual product costs and sales can add to the detailing of a budget. If prepared with enough detail, budgets can reveal where the company generates most of its cash flows and profits.
Budget preparation helps organizations in determining resource requirements accurately and setting realistic annual financial targets. It would be best if, alongside its budget preparation, a company also forecasts its future cash flow.
A good habit for maintaining your company’s financial health is to measure its profitability over the years. An easy way to determine the profitability of a business is by calculating its profit margins. Profit and loss statements prove useful when managers are estimating the company’s profit margins. In simple terms, the gross profit margin displays a company’s gross profit as a percentage of its net revenue/sales. For instance, if the annual turnover is $200,000 with the cost of goods sold is $80,000, your company’s gross profit will equal $120,000, having a gross profit ratio of 60%.
By paying closer attention to its profitability, you can assess your business’ financial standing and the strength of its capital structure. The level of profitability can even highlight specific business areas that lack innovation and require improvement. You can judge if there’s upward or downward pressure on your prices.
The cash flow statement portrays a company’s financial position regarding the amount of money flowing in (cash inflows) and out of business (cash outflows). Cash flow statements are a great indicator of whether a business’ cash reserves are increasing or if fulfilling the day-to-day business obligations is running them dry.
Cash flow management and regulation remain one of the primary concerns of several business executives. Poor management of a company’s cash flow may force it to shut down, as it can run out of the necessary funds to continue day-to-day business operations.
A company with the absence of cash flow forecasting is at a greater risk of facing this dilemma. Mismanaged cash flows lead to a higher cash burn rate and a looming threat of the business’ cash flows turning negative.
The Bottom Line
Finance helps ensure that your company’s operations and tasks generate value, that it pursues financially feasible projects, and that its assets bring sufficient return on investment. The world of finance is interlinked with future planning using effective budgeting and forecasting. Finance also aids in applying this information to enhance business performance, such as process improvement and intelligent decision-making. This article provided a closer look at finance to non-finance managers who cannot comprehend the financial world’s depths. We covered finance fundamentals, including financial budgeting and forecasting, financial statements and their components, profitability, and cash flows.
If you wish to climb the corporate ladder, it’s essential to keep a mental note of all the basic finance terminologies and accounting processes mentioned here to ensure you succeed.