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Understanding Business Finance is a fast and efficient course on how to grow your business and covers the process of running a business from start up to the first year of trading.
How To Understand Business Finance
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Today’s market is increasingly unpredictable, so non-financial managers need to understand the process of financial accounting and management.
How to Understand Business Finance is part of the best-selling success series, published in association with the Sunday Times, which has been translated into 25 languages and sold more than 500,000 copies. This book is for those who do business in the real market. This is a fast and efficient financial literacy course for business development, following the journey from starting a business to the first year of trading.
In addition to understanding the balance sheet and income statement, the reader will learn the following principles: market dynamics; budgeting and forecasting; Fixed and variable costs; fracture analysis; The difference between profit and cash; Financial indicators for measuring business results; investment appraisal; stock market indicators; shareholder value; Financial tools to improve business results and more.
Understanding business finance will help you understand the real-world implications of double-entry accounting, supply chain management, differences between American and British accounting terminology, financial ratios for measuring business performance, common totals, and cash flow in investments.
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Robert Cinnamon is a world-renowned teacher. As director of the international training and consulting firm Insight Marketing & People, he runs popular master classes and training programs within Demystifying Financial Management.
Brian Hellweg-Larsen is a world-class educator and director of Profitable Business Solutions. He teaches in three languages on five continents and conducts business simulations for Harvard Business School’s MBA program. So far in the blog we have seen why we are in business and how it comes about, various pressures. We must own the business and manage the spectrum in which all businesses operate; From a dream to a nightmare.
There are many reasons why your business may be at different points on that spectrum, and why it can go from one end to the other, sometimes in what seems like a single day! At the Business Growth Institute, we help business owners understand all the different elements of their business and where they are weak or strong using a business diagnostic system called Rocket.
While there are many moving parts in the business, you can see The Rocket highlighted in red
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, the basis of every business and where we always start is the production of finance and cash and transferring it to the financial fund of the company.
The whole assumption is that whatever problems your business has, and it doesn’t matter where those problems are, if you don’t make money at the end of the month, your runway will shrink and eventually you will fail. Yes go. ,
To prevent this from happening, we talk about the maturity of the financial components of the company and how the financial components of your business must be proportional to the size, scale or ambition of your business. By getting a strong handle on your business finances, you can build a financial foundation to generate cash and profits to solve the remaining rocket problems.
When it comes to the financial background of most companies, the statistics are actually quite shocking. Industry research shows:
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From my personal experience, I would say that in 40% of profitable businesses, half are reasonably profitable, and the other half do it all! It often has more to do with the niche than anything else. I’ve seen bad management in great places make serious money, while good management in bad places just survives. In my opinion, having a good defensive position under the radar is the key for SMEs to make serious profits, but that’s a blog for another day. Let us know if you want to read it by voting for it here and we’ll write it. ,
In your business. When dealing with customers, we put the financial first. Profit and cash flow solve many problems. Once this is resolved, you will have the stability and resources to address other issues in your business.
Before I get into how to orient your business for profit, I want to start with a framework for determining the flow of money through a business, which we call the financial mechanism.
There are many components, the first is sales and income depends on assets and operations. I mean, of course, sales and profits do not happen, sales are driven or created by the assets of your company and the activities of your team to exploit those assets.
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For example, if you are making a profit from real estate and you own one property, the profit from it will be completely different from a portfolio of 10 properties. The more property you have, the more you should sell. Assets are not just physical assets on your balance sheet, but operations and other assets such as brands, market positions, teams, contracts, customer relationships, intellectual property, etc.
Now that you say it, it sounds obvious, so why say it. I say this because the first thing you see in your account is profit and loss. The first thing you look at in terms of your profit and loss is sales. There is usually no indication in your account that income is based on assets. The relationship between income and performance is present in profit and loss, but it is not as complete as it could be and is in fact incorrect.
Sales are generated by activities (as well as assets), so to truly understand how you generate sales, you must first think about activities and their costs.
Well, sales flow out of your property and operations. If you want to increase sales, increase your asset base and understand what your team is working on, or get more of them. You may want to create people components based on employee numbers, skills, or employment options to increase sales.
Objectives & Readings
The first thing that appears in the profit and loss is sales. Unfortunately, to sell, we have to pay and these are in two main categories;
There are many misunderstandings and disagreements about whether costs should be included in direct costs or overhead costs. You may think that this is just a technical accounting problem in the dark room. This can be a real mistake that will cost you thousands. The way you analyze your business affects the decisions you make, which have a real impact on your company’s ability to make money. Getting it wrong can have a serious impact on your pocket money.
I will give you an example. A few years ago I was asked to help make £10 million work for £1.8 million A social enterprise that has achieved only 1.8 million pounds. Experienced GBP loss for the first time in history. FD’s management accounts are not well structured and mixed with direct costs of various business units. He suggested that part of the business, which made large losses in the paper, be closed.
My analysis divided the costs into direct and overhead costs and showed that after direct costs, the department contributed significantly to the total costs that would remain after the department was closed. If it is closed, the deficit will increase, not decrease.
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That company does great things for the community. I am very proud to have worked with the board to turn the business around, which now generates £700-£800,000 of EBITDA per year. Still not good, but it works and still helps the community.
So how do you decide if something is a direct cost or an overhead? For example, if you sell a widget, your direct costs include the cost of shipping to the customer, the cost of materials and all labor costs associated with creating that widget. These are all direct costs.
All of your expenses are the costs of running your business. The cost of running the office, insurance and many things like that. Generally, you will have those costs whether you sell one widget or 100 widgets in a month.
If you’ve been in business for a short time, you’ll know that profits or losses don’t really translate into cash (unless you have a very basic cash business). Generally, it takes time for business profit or loss to occur
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