Do you often get lost during financial updates from senior executives? Does the jargon all go over your head and you begin to wish they’d use simpler words and talk slower? Do you sometimes feel like you don’t really understand where you fit into the big picture of the business?
It happens to the best of us. Unless you work in a finance department, you probably rarely – if ever – get to see the in-depth financial situation of your company. However, if you want to be a successful manager, or aim to climb the ranks within your company, it’s vital you understand financial information and the overall health of the company, and how your actions can directly affect it.
Whether you work in a business that expects high profits every year, or you’re in a small non-profit, every organisation must take its accounts seriously. No budget is bottomless, and when one department takes money, that means it isn’t going somewhere else.
A company is like a big machine with lots of moving and interconnecting parts. When you turn a lever, the mechanisms rotate and twists something on the other side. When you don’t know how the machine is put together, these actions can seem random and unpredictable. When you look closer and start learning which cog connects to which lever, you can understand the interconnectivity of all the different parts and begin to deliberately control each small movement.
When you make a decision in your department, you may not always think about how it will affect your colleagues on a completely unconnected project. And yet, just like the machine, it’s all connected. If you take the time to really think about how all the different departments and projects within your company link together, you’ll start recognising the pattern and take notice of consequences you may not have originally noticed.
Your business ecosystem
Before focusing on your own company, take a minute to think about the ecosystem you’re working in. This will allow you to consider the financial situation in its full context. For example, if you have few real competitors, you might have more financial freedom than if you’re caught in a price war with many other companies. For more on the forces affecting your business, we’ve got a whole article here.
A business ecosystem is the term used to describe all the connected and symbiotic elements that interact in your business and industry. This can be everything from suppliers, customers, competitors and retailers. There is a natural push and pull within a business ecosystem, where the actions of one directly affects the others. All the ‘organisms’ within the ecosystem have roles and functions which change and develop over time.1
Any business leader who wants to be successful should also keep up with the latest market and industry insights. This means staying abreast of current market conditions, any new or upcoming regulations, trends and more.
The more information you have, the better you’ll be able to understand a situation and weigh up the pros and cons of any financial decisions. This is crucial when choosing what to invest in, whether to hire someone new or to spend money on different aspects of the business.
Internal financial metrics
Now you’ve got an up-to-date view of the external markets you’re working in, the next step is to gain confidence in the internal metrics your company uses. Keeping at least some track of your company’s key financial metrics will give you real, quantifiable data to help you make well informed decisions and be able to measure their effects.
This may mean having a look at your company’s internal data, or your leadership team may regularly share this with you. If you work in a publicly traded company, they’re legally required to make their financial reports open to the public, so you should always be able to access the latest version. Shareholders will use this to see how their investments are doing; you can use it to make better business decisions.
No matter what your company or organisation does, without money (cashflow) it can’t keep running. Even charities and other non-profits need to pay salaries and bills. Therefore, every company should have identified their key performance indicators (KPIs) and financial metrics. These are data points from which to measure the company’s financial health.
Most companies will measure many of the same core metrics, such as net income, gross profit margins and working capital. They’ll also need to track their operational costs and expenditure. If you aren’t comfortable or familiar with these terms, it’s important to spend some time learning about them. These are monitored them closely because they’ve learned that they make the biggest impact on the bottom line results.
You may be tempted to leave these in the domain of the Finance team, but every manager needs to understand these key business concepts. Money is the lifeblood of a business, and unless you know the impact you’re making and how to manage your own budget, then you’re potentially risking the financial health of your company.
There’s obviously much more to this topic than we can cover here, but let this be the spark you need to spend the time learning about and understanding how your company makes, spends and measures its money, and where you fit into that process. Your decision making will get better and so will your ability to justify those decisions to others in the company. You’ll be able to speak with authority and know you’re helping your company grow and use resources wisely. Or, at very least, the financial updates will start making more sense!
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