Financial Knowledge for Business Success

Financial Knowledge for Business Success

The main motto of any successful small business is selling a product or service for a profit. There are many additional ways to make money if you have the financial knowledge to do so. By expanding your awareness of how money works in business, you can increase the odds by being successful. Not many are aware that financial mismanagement is responsible for much of business failures the world over. Perhaps as high as nine out of 10 businesses that fail do not fail because they had an inferior product, nor because their marketing was inefficient and also not due to labour problems, but because of bad financial management. The truth is that finance management or mismanagement happens in every department of an organization. Most decisions taken by various so-called non-finance managers/executives are in fact financial decisions. A decision taken by a salesperson, who is offered a large order provided he can cut price, to accept or to refuse the offer, is a financial decision. A decision as to the levels of inventory to be maintained by the stores' manager is a financial decision. An HR decision as to the size of the ‘bench’ to be maintained is also a financial decision. In fact, what happens in the finance department is largely accounting related. Finance management, or lack of it, takes place in all the other departments. Every manager is a finance manager.

Finance is the process of creating, moving and using the money, enabling the flow of money through a company in much the same way it facilitates global money flow. Money is created by the sales force when they sell the goods or services the company produces; it then flows into production where it is spent to manufacture more products to sell. What remains is used to pay salaries and fund the administrative expenses of the company.

When some element of the finance process breaks down companies go out of business and the economy moves into recession. For example: If a major bank loses a significant amount of money and faces the risk of insolvency, other banks and corporate customers will stop lending or depositing money to the problem bank. It will then stop lending to its customers and they will not be able to purchase the goods or pay the bills for which they were seeking funding. The flow of money throughout the financial system slows down or stops as a result.

All facets of the global economy depend upon an orderly process of finance. Capital markets provide the money to support business, and business provides the money to support individuals. Income taxes support federal, state and local governments. Even the arts benefit from the financial process because they draw their money from corporate sponsors and individual patrons. Capital markets create money, businesses distribute it, and individuals and institutions spend it.

Taxes

Every penny you save on taxes is a penny you can put back into your business. Even if you don't do your own taxes, you need to understand the financial concepts of depreciation, deductions and tax credits so that you can run your operation in such a way that you pay the lowest taxes. This is not just a matter of a CPA finding write-offs at the end of the year. It's a matter of looking ahead and realizing the tax savings from your decisions.

Reviewing Financial Statements

If you nod and pretend to understand your accountant's explanation of your financial statements, you are doing yourself a disservice. It's up to you to be aware of your profit margins, sales growth, debt burden, and asset values, to give a few examples. These are all important areas of financial knowledge that can help you make decisions that will make your business more prosperous.

Investing

Many businesses make money by investing their available cash when they're not using it. Your financial knowledge should include understanding the variety of investment vehicles available to you. From certificates of deposit to stocks, bonds, and real estate exchange-traded funds, you can put your excess money to work and greatly increase your profits.