As a business owner, you need to make decisions to navigate through the journey of fulfilling your business’ vision, mission and goals.
From my experience, most tend to base these decisions on our subjective judgments, such as our personal opinions, abilities and intuition. For instance, thinking that your company is underperforming based on your assumptions and going into action mode. While this isn’t entirely wrong, depending solely on these subjective assessments may lead you in the wrong direction.
This is why, as a Business Coach, I always advise business owners to substantiate their decisions with the finances behind a particular situation. The numbers are tangible and having objective financial knowledge is a reliable way to help you make more informed decisions. So, back to the example above, instead of just assuming the company is underperforming, you can review the profit and loss statements, revenue reports and cash flow forecasts to find out for sure.
It’s when you combine both your subjective judgements and back it up with the numbers that you really have all the facts to act.
Here’s how business owners can use both sides to guide their business to success.
What is financial knowledge?
Financial knowledge basically involves the interpretation of the numbers behind a situation. It can be as simple as deciding what role to hire based on workloads versus budget, or as complicated as monitoring the stock market forecast regularly for your investment projections.
There are countless ways financial knowledge comes into play in our daily lives. However, more than acquiring knowledge, it’s our ability to apply this to enable us to make an impact, especially in the business setting where information is essential in informing decisions.
Why should business leaders sharpen their financial knowledge?
People often underestimate their ability to grasp understanding the finances of an organisation as they view it as obscure, boring or frustrating. So, they leave it in the hands of accountants, auditors and finance officers.
Sure, these finance professionals can look at your numbers and tell you all you need to know. But as a business leader, understanding this personally gives you so much more confidence and allows you to trust that your decisions are backed by solid and tangible numbers you could actually make sense of.
Here are other benefits to financial knowledge:
- Maximises your effectiveness as a leader
Interpreting a business’ financial standing helps you eliminate vague assumptions, ask the right questions and justify the decisions you make for the company. This equips you with more expertise around your business and opens more opportunities for growth.
- Leads to better outcomes
An understanding of your financial standing is critical to the decision-making process. A general financial knowledge and not understanding where the numbers are pointing, what they mean and what they can do for your business could lead to unsubstantiated predictions.
- Reduces business expenses
When you know how to manage finances effectively, you lessen the cost of doing business by reducing the need for unnecessary expenses – all possible just by being financially literate.
- Lessens stress and anxiety
We always worry about something we don’t truly understand, and finances are no exception. However, you can feel more confident knowing you can monitor finances easier, and your goals are backed by numbers.
Remember, finance is the language of a business, and it’s not enough that you just know how to understand it when you read it. It’s important to converse using this to help you see your company from a broader perspective.
To help, here are five basic good habits around managing finances in your business.
How to apply financial knowledge into practice?
- Review your finances monthly but turn them into your language.
To put your financial knowledge into practice, you need to have two minds working together – your business and finance brains. Start with your finance-savvy side by setting time aside to look at three important elements of information: profit loss, balance and cash flow, every month. Only then can you switch into your business brain and apply this financial information to your business goals.
- Don’t think of business audits as “cold numbers”.
Instead, view them as valuable information sources and indications of company health, direction, trajectory and so on. You don’t have to be an accountant to understand your business’ finances. It’s about augmenting your knowledge with the numbers behind your business.
- Set financial Key Performance Indicators (KPI)
A KPI refers to the measure of performance over a given period for a specified goal. By including your KPIs into a business dashboard for your finances, you can track business performance, summarise progress, monitor the alignment of your team in meeting the goal, and make the adjustments needed.
For more information, you can read my article: How A Business Dashboard Can Help You To Sleep Better At Night.
- Implement a system for defending your business against bumps on the road.
For instance, set boundaries on acceptable cash flow levels and steps of what to do if this number is reached. This helps you set a rinse-and-repeat process to help maintain your business framework or seamlessly readapt when circumstances warrant your business to do so.
- Have a system for managing cash through different bank accounts.
Treasury management is part of having excellent financial management. There’s a number of books I can recommend on this habit as well as how to properly manage your finances in general. But basically, smart business owners allocate funds into different accounts for a particular purpose, to avoid the one account “slush fund” from happening.
Let me guide you towards the business-savvy financial knowledge you need.
As a Business Coach and Mentor, helping you see the big picture through the numbers behind your business can really develop your skills and solidify your understanding when making decisions.
That’s how I can help you.
I empower business leaders by enabling them to use their financial knowledge to create beneficial decisions for the business and ultimately, guide them towards success in a practical way.
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