Executive Intelligence: The Essential Guide To Business Finance For Non-financial Managers

A silo is confining

A silo is confining. There are no corners to hide in. The sides are tall and smooth. Escape is difficult.

Fortunately every non-financial manager can acquire a key to open their silo door. What is a non-financial manager? They are executives who operate in a business function that doesn't primarily deal with the sources and uses of capital, otherwise known as money. A sales manager is great at closing the transaction but doesn't understand customer creditworthiness. A marketing manager may be superb at content creation and design but cannot calculate the return on her investment in advertising. Every non-financial manager unwittingly builds a business silo through intensive focus on their core competency. A manager can increase their value to the organization by becoming functionally literate about business finance.

The first step is to get a basic financial accounting education. Business teams are increasingly cross-functional today. The sales group must understand the needs and requirements of the accounting and finance team to maximize stakeholder value. Community colleges, universities, trade associations and coaching services offer basic accounting education. You will have the essential tools after training to understand your company financial record keeping procedures and make informed business decisions from the financial statements. You need to understand the basics of double entry accounting, how an accounting cycle works, how financial statements are prepared and the difference between cash and accrual accounting.

Next, learn how to interpret financial statements. The ability to read the financial tea leaves of your customers, suppliers and your own organization can be priceless as you avoid financial entanglements with unstable companies. The three basic parts of a business financial statement are the balance sheet, income statement and cash flow statement. Your balance sheet is a snapshot in time of what you own and what you owe. Your income statement tells the story of how you made money and how you spent it. The cash flow statement clears the smoke of accrual accounting for a clear view of the sources and uses of cash in your business. Learn to read and understand basic financial statement gauges including operating, leverage, debt coverage and liquidity ratios using time-series and cross-sectional financial statement analysis.

Know how to correctly calculate your business return on investment (ROI). Every business activity from a marketing campaign to an investment in equipment has a cost and expected benefit. The ability to maximize the return on your limited business capital is vital to financial success. There are three primary methods of evaluating the financial return of a capital investment. You can look at a static or pro forma return on investment (ROI), an internal rate of return (IRR) or the net present value (NPV) of an investment. Actually, you can use all three methods to have a more complete financial picture.

Get smart about debt. Too many businesspeople treat debt as an afterthought in the strategic planning process. The strategic capital planning process begins with financial projections of income, expenses and cash distributions. So what happens after you determine pro forma income will be greater than projected expenses to generate positive cash flow? The cash will typically go one of two places depending on how the investment was funded. Who gets paid first, owners or lenders? How can you keep more of the cash flow? You need to know how to borrow money.

Essential elements of the borrowing process include an understanding of the financial exposure from loan guarantees, what makes an attractive borrower and determining the right loan amount. You need to understand the role of mortgage brokers, how to strategically choose between defeasance vs. yield maintenance prepayments, key terms in your loan agreement and how to assemble your loan team.

Learn how to safely handle leverage. Loans add an extra layer of complexity with multiple variables subject to market forces outside of your control. An investment with a rate of return greater than the loan interest rate generates positive leverage. If the return on investment is less than the loan rate then you have a negative leverage situation. Leverage is a double-edged sword with a positive edge that will help you conquer your business goals and a negative edge that cuts deep. Keep more investment cash flow with a strategic financial plan for smart, positive leverage.

These and other basic finance skills will give you a greater understanding of the financial impact from decisions made in your business unit and break down cross-functional silos.

by: Michael Shelton

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