Financial literacy is an essential skill to hone and sharpen, regardless of your position within an organization. Of course, it’s a skill that’s central to a finance and accounting role, but for anyone working in business, financial literacy is critically important to your ability to comprehend the financial levers and drivers that drive your business strategies.
As a management consulting firm, we work with clients across many industries, which requires our team to maintain a high level of financial literacy. The team recently engaged in a training to refresh and refine our skills by reviewing key principles that provide value to our clients and anyone working in the corporate world.
- Start with the basics
Before you can get started sharpening your financial literacy, you first need to assess where you are in both individual and team environments, and what foundational knowledge you’ll be building on based on the collective literacy of your team. Do you have expertise in the operational side of finance, but lack accounting skills? Or perhaps you have strong literacy overall but cannot translate technical financial concepts into industry terms.
It’s helpful to start at the beginning, defining the building blocks of your finance and accounting systems and providing an overview of what levers are most impactful to your business strategy: assets, liabilities, revenues, expenses and financial statements. For teams, this provides a useful refresh and ensures everyone is working with the same knowledge base before moving into advanced topics.
- Know the difference: Income statement versus balance sheet
Regardless of the industry you are in, it is useful to know how different types of transactions impact both the income statement and balance sheet, and to understand the relationship between the two statements. Defining these reports and being able to tell the difference between financial performance and financial position will set the stage for more insightful business analysis. For example, an inventory balance by itself is a useful piece of information but comparing it to annual sales and calculating a days-sales-of-inventory ratio gives a much more concrete picture of a company’s normal business cycle.
- Sales and cash are not synonymous: Accrual accounting
Accrual accounting is the concept that transactions are recorded when they substantially occur, not when they are settled in cash. The distinction between recording transactions and the cash settlement enables you to interpret what balances on the financial statements actually represent. For example, a company that does $100 million in sales does not necessarily have $100 million in cash. How does the difference between the two impact the company’s ability to pay its bills? Knowing this difference and understanding accrual accounting will make you a savvier analyst with the ability to answer these types of questions and define the business impact.
- Pay attention to the details: Proper account coding matters
Each transaction that flows through an accounting system is coded to an account string. This “string” may be as simple as an account name or number, but in more sophisticated systems, the string will consist of multiple segments that identify variables like the account, company code, location, cost center, etc. These segments can be used to produce reporting for different areas of the business, which makes coding of transactions to the correct account strings of central importance to produce accurate financial statements. To avoid errors within your balance sheet and income statements, transactions need to be recorded with precision and accuracy.
- Not all financial metrics provide value
The financial metrics you measure and monitor will vary by industry, so it’s crucial to understand the variables that are most relevant to your business and prioritize the associated metrics accordingly. For example, if your business is in wholesale distribution, you’ll want to closely monitor how quickly inventory turns over and whether your backlog of orders is increasing or decreasing. Manufacturers need to closely watch raw materials and scrap, whereas a professional services firm must be laser-focused on billing rates and utilization. In today’s data-rich business environment, it’s easy to get lost in the sea of numbers or to be blinded by metrics that can skew your business analytics without having a tremendous impact on your financial success. Companies will make better decisions if you are tracking and measuring the financial metrics that matter most to your business.
- Cash is still king
We cannot underscore the significance of cash to your financial success. Cash is the lifeblood of any business. The amount of cash that a company has in the bank varies widely from day to day, but it’s essential to ensure that there will be enough cash available to pay the bills at any future date. To do that effectively, the business needs to create and manage a process of forecasting the flow of cash, which involves timing estimates for numerous events, including:
• The collection of open accounts receivable from credit sales
• Planned borrowings from operating lines of credit
• Payments due to creditors from accounts payable
• Payroll and associated taxes and benefits
• Other planned collections or disbursements
By entering the starting amount for any period in a simple spreadsheet and aggregating the impact of the “ins” and “outs” by day, the business will be able to see the forecasted cash balance for any given day.
The financial success of your company is something all employees should be invested in, regardless of their position. This is certainly essential now as economic volatility continues to have dramatic impacts on the corporate world. Investment in a company’s financial literacy, either through programs or trainings, will help improve your competencies, competitive advantage and prospects for financial success.