Boosting Financial Ability and Understanding

Perhaps you are not an expert in finance. Yet, having a grasp of terms like Net profit, Capital, Net Present Value is important no matter where you sit on the organizational hierarchy . How can you boost your financial acumen? How do you decide which finance concepts are most important to understand to your work and your understanding of the business? And who’s in the best position to offer advice?  Dr Sachin K. Mittal, Professor, IBMR, IPS Academy, Indore shows you the way.

Rebecca Knight explained in her article that an absence of financial savvy-ness is “career-limiting.” If you can't contribute to a discussion about the performance of the company, you're unlikely to make any progress. Unless you understand the financial aspects, you will not be able to be fully involved in running projects. Therefore, this article suggests some strategies to improve your financial intelligence.

Overcome Your Fear of  Finance

Stop avoiding financial data because you’re afraid of finance calculations. It’s not rocket science. It’s not that complicated. Finance and accounting are very simple. It’s mostly addition and subtraction and occasionally some multiplication and division. If you can easily understand simple mathematics, you can easily understand finance.   

Learn the Terminology

There may not be any magic to finance, but there is a fair amount of jargon. Fortunately, in the era of the internet and technology there are multiple ways to learn the terminology, you just need to take initiative. If your firm offers any training in the finance area, take advantage of it. If it doesn’t, consider enrolling in any online or short term course of any institute. There are also many books and reference guides available on the topic. The most important concepts to grasp are how to measure profitability, EBITDA, operating income, revenue, and operating expenses. A finance textbook or reference guide is a good investment if you really would like to overcome financial fear.  

Understand the Financial Statements 

You need to immerse yourself in your organization’s financial statement. Financial statements mainly cover profit and loss accounts, balance sheets and cash flow statements. Balance sheet is the most important statement of assets and liabilities of a firm, therefore, take an interest in the balance sheet and then do the due diligence to understand it. In addition, the best routes to reproduce the profit and loss account data either in excel or on a paper and then group them into categories. You can start to see how much your firm spends and where it makes profit. Convert the balance sheet data into a percentage form which is also known as a common size statement. It will not only help you understand the statement but will also help you in the interpretation and discussion of the financial results of the firm.

Emphasis on Key Measures

Boosting your financial expertise requires figuring out the key ratios by which your firm evaluates success. Your aim is to gain an understanding of the precise relation between profit and loss, and how it affects the success of your company over time. That data is often expressed in the form of a ratio. Every organization has four categories of ratios in common: liquidity ratio, profitability ratio, solvency ratio, and operational efficiency ratio. From these entire categories, there are mainly 4 to 5 ratios that are primary which help you to understand the short term and long term solvency position of the firm.   

Play with Numbers

Once you have a good understanding of the balance sheet and income statement then you can think of driving your company’s growth. You can experiment and play with the numbers by going through a series of what if and scenario analysis. For instance, what will be the impact on profitability if prices were lower? What will be revenue if the advertisement budget increases? What if costs go down or up? This kind of analysis can be done easily if you are techno-savvy and know to use MS Excel. 

Find a Financial Trainer

Another way to improve your financial ability is to associate with a senior financial expert or operations manager who is willing to advise you and answer your one-on-one questions. Mentors are always helpful. These experts can both help explain concepts and serve as a sounding board for any financial decisions you need to make. 

It is normally assumed that financial management is the job of a finance department or a finance executive. But practically the financial performance of any firm is decided by the performance of non finance professionals. In this, even the HR executive must understand what will be the impact of HR expenditures on the firm's total cost. A marketing expert must realize that advertising expenditures should have a proportionate positive impact on sales data. Therefore, every professional of a firm must be a financially literate person. Finance is basically a business language and every one can communicate with the help of this language.         

Key Things to Remember

Do:

•    Enroll in any institute or college class to learn basic concepts and terms of finance

•    Analyze your firm’s financial data that will help you to understand the specific things required to be profitable

•    Experiment with numbers on your organization’s balance sheet by going through a series of “what if?” scenarios

Don’t:

•    Be scared - business data is relatively easy and understandable

•   Do it alone - Identify a financial consultant or advisor who can help answer your questions

• Overlook the impact of financial skills on your career.
• If you want to progress, you need financial acumen

- Dr. Sachin K. Mittal

Professor, IBMR, IPS Academy, Indore