It’s critical for all leaders of a company to have their finger on the pulse in their company’s finances. Having an understanding of where you stand, combined with a strong sense of where you want to take your company, and the knowledge of how to create value along the way, can give you the insight that you need to lead your company to larger, and more sustainable success.
Benefits of Understanding Your Financial Position
As a leader, taking some time to understand your business finances provides key information that you need to make the best decisions in difficult times. It truly is impossible to know in which direction you should lead your company without a familiarity with your company’s financial position.
Unless you know your company’s current financial status, it becomes impossible to make unbiased, impartial, logical decisions. Common decisions, such as whether or not to expand facilities, develop new products, or even how to best allocate scare and valuable resources in a department, all become a guesses unless you have an intimate knowledge of your company’s inner financial workings.
Understanding the company’s finances can also give you the courage and independence that you need to be able to disregard popular but unwise financial advice. As a leader, when you are familiar with your business finances, you are less likely to fall prey to gimmicks that have brought down some of the world’s largest and most well-known businesses. These gimmicks include financial “engineering” that temporarily improves the company’s balance sheet for investors while hiding the true condition of the company or taking on excessive leverage to expand during a downtown in your market.
When you understand the true financial condition of your company, it can insulate you from false beliefs that many CEOs fall victim too, such as mistakenly believing that a recent surge in sales or other bubble means that the normal economic rules no longer apply to you and your company.
Top 4 Areas to Focus on to Improve Your Financial I.Q.
Whether you are the CEO of a large enterprise, or even a sole proprietor of a small company, take some time to get acquainted with your company finances while this year is still fresh and new. Narrow your focus to the following top four areas to help you get a better handle on your company’s current financial position so that you can make better decisions that will help you to lead your company to greater long term health and prosperity.
Accounts Payable. Who does your company owe money to, and are you current? Understanding how much debt your company currently owes, and whether the bulk of that money is financed as short or long term debt is critical for helping you to increase both cash flow and profits. Take some time to investigate how much money your company owes, and who you owe it to, before you make any decisions that might increase your overall debt level or before you take actions that could lead to greater costs for credit later.
Accounts Receivable. Do you know which clients owe you money and which ones are current with their accounts? Take some time to review the average age of your accounts and consider adopting policies that will shorten the age of your receivables in order to increase cash flows and help your company to conserve cash on hand. This is an especially crucial step to take if your company is in a sector that is experiencing a downturn or if your company has experienced anemic profit levels in the past.
Processes, Overhead and the Cost of Doing Business. As you review your business finances, take some time to look at your company processes overall. Is there a department or area that seems to devour a large portion of your operating budget? Is there a way that your company can simplify its processes and cut costs while still ensuring quality and high service levels? Is too much of your budget tied up in inventory that slowly if ever turns? Every process of your company, from man-hours and the way that you pay employees to the way that products are produced, shipped and sold should be studied and reviewed with an eye towards improvement, simplification and greater turn.
Expansion and Other Plans. Once you have a firm grasp of where your company stands financially, it’s time to look to the future and make plans for expansion, new product development, as well advertising and other marketing strategies. As you focus on your vision for your company, and set goals and objectives, understanding your current financial condition gives you the power to make plans and projections based on facts and logic rather than guesswork and hopes. This makes it more likely for you to achieve your company’s goals without making poor financial decisions that could lead to short term, or temporary gains that occur “on paper” only but that are unsustainable over the long term.
