Even if you don’t work in finance, as a business owner, you must possess accurate and precise knowledge of company finances to make the right decisions. Without a strong background in finance, that isn’t possible.
Since finance is as crucial as any other business function like marketing, operations, supply chain, and HR, almost every business degree covers it in the form of accounting, risk management, investments, and other related courses.
Some business owners are solely responsible for managing their company’s finances and other managerial duties. It helps them control their finances the way they want while keeping a close eye on all cash inflows and outflows.
At times, you might think company finances are too much for you to deal with, and you’d hire a team to handle it. But remember, knowing about company-related cash flow is crucial if you want to progress further.
With that said, here is a breakdown of reasons why financial understanding is necessary for business leaders.
1. Helps Develop the Ability to Analyze Data
Business leaders, managers, and department heads must analyze data in numbers almost every other day. Without tracking trends, analyzing sales data, and measuring stats, sales projections would be impossible.
Every manager, supervisor, or executive must set short-term, medium, and long-term goals for their departments. Even though the CEO is responsible for planning the company’s future direction, they must assess financial data.
Suppose you are an entrepreneur or even an established business owner who wants to manage company finances. In that case, you should register for an online masters in accounting no GMAT required degree asap.
A financial degree will teach you all the fundamentals and principles of accounting, including the ability to prepare financial statements without hassles. The best thing about online degrees is that you can pursue them online while working a regular 9 to 5.
2. Instills Analytical and Strategic Thinking
Analytical thinking insinuates the ability to collect, gather, visualize and analyze information by looking at it from different angles. It allows you to make decisions more effectively and solve complex problems.
Analytical thinking includes attention to detail, the ability to collect and look at the correct information with purpose, and the ability to make technical decisions.
Strategic thinking, on the other hand, refers to the ability of a person to solve problems effectively and efficiently and make the right decisions at the right time. It includes knowing the purpose of analyzing information to solve the most complex and unique business problems.
With strategic thinking, managers and department heads can set goals and targets for their respective departments and the company with proper resource allocation and prioritizing tasks based on urgency. Clear financial knowledge is essential since you cannot allocate resources without it.
3. Ability to Understand and Interpret Financial Statements
A company’s financial statements include a balance sheet, income statement (or profit and loss P&L statement), cash flow statement, and shareholders’ equity statement.
They demonstrate the financial health of a company. As a business leader or owner, you maintain your debt-to-equity ratio, check financial gains and losses, and make sound investment decisions.
In addition, you will need to show and interpret the company’s financial statements to shareholders to make future business plans. To do all these things, you need to know how to prepare financial statements – you could use templates like a Flash Report template. You would also need to understand how to interpret these statements, declare them, share growth ideas, and determine your financing options.
4. Compare Department Progress
A leader’s job is to stay updated with the business progress, which means staying abreast with department progress. It would be best to compare department progress with the overall organizational goals.
If one department lags, all the other departments will suffer, and the overall company profits may drop. Therefore, you need to analyze and compare the progress of all departments to figure out the problem.
For example, if your company’s sales are falling or not meeting its targets, it could mean less cash inflow, lower revenue, wasted inventory leading to higher costs, or other problems. To delve into the problem, you need to be able to manage your finances and find a way to cover your losses with strategic solutions.
If the sales slump is due to poor marketing strategies, you might need to increase your marketing budget and adjust your strategy. It may increase costs in the short-term but will turn into lucrative overall company profits. A leader with a poor financial background may be unable to make such decisions.
5. Evaluate Financing Options
When deciding and selecting company financing options of investment, debt, equity, or debt to equity ratio, you need to be familiar with liquidity, debt, profitability, and valuation ratios. You may not know about these without having a firm grip on financial knowledge.
To keep your business afloat, you must choose the right financing options. For example, in the initial years of the business, you may have to reinvest everything the company makes back to keep it afloat.
Once the company starts making a profit, you may decide to hire resources to improve the quality standards of your offerings. With larger profit margins, you may stretch your expenditures, take out loans, invest in its growth, and increase shareholder dividends.
All such decisions lie on the foundation of sound financial understanding. You must learn to balance your company’s finances to ensure stability and optimal financial health.
Good financial understanding leads to the right business decisions. It helps develop the ability to analyze data, instills analytical and strategic thinking essential for making long-term decisions, and the ability to understand and interpret financial statements, compare department progress, and evaluate financing options.
To do all these and prove to be a good business leader, you must stay updated with the fundamentals of finance to analyze trends, set the company’s direction on the right path, and expand business operations. Developing a good financial understanding can help you achieve that.