Making it all add up: how to boost your financial skills as a leader

Being financially savvy is a must for any role in business: it helps you communicate effectively, make informed decisions and demonstrate your value. But finance can seem daunting if you’re not a numbers person. So, how can you boost your financial skills? Here, Amol Maheshwari provides some tips to boost your financial intelligence

Don’t let numbers put you off from finance; it’s not as hard as it looks. Finance is just a way of keeping score in business – just like you need scoreboards in sports, you need financial statements in business.

Learn the language

Finance may not be rocket science, but it does have its own language. Luckily, there are loads of resources to help you learn it, both online and in books and guides. The most important concepts to nail are usually revenue growth, operating profitability and cash flow – all of which you can see by looking at the company’s profit and loss (P&L) statement. Receivables and payables along with total debt are the key things to keep an eye on in the balance sheet.

The best way to learn is to copy the numbers either electronically or on a sheet of paper and then group them, so you can start to see how much the business spends and where it makes money. Convert the numbers to percentages so you can easily see the breakdown of revenue and expenses and focus on the bigger picture.

Know the metrics

Improving your financial expertise requires knowing the metrics that your company uses to measure success. Your goal is to understand how the company makes anprofit and which performance factors make it go up or down. There are four ratios common in every company: profitability, leverage, liquidity and operational efficiency and combinations thereof are the performance measures, in addition to industry-specific ratios.

Play with the numbers

Once you have a solid understanding of the financial statements and what drives your company’s growth, you can have some fun with the numbers by going through a series of ‘What if?’ scenarios. For example, What if prices were lower? What if revenue was higher? What if costs go up or down? This helps you really understand how changes in business affect the financial statements and their assumptions. That way, when you do need to figure out the impact of a particular decision, such as whether or not to launch a new product, or take on a new project, you have the tools to do so.

Understanding financial statements

Let’s take an example of a small bakery called Sweet Treats, owned by Sarah. Sarah wants to understand her bakery’s financial health better. She starts by looking at her P&L statement, which shows her revenue from selling cakes and pastries, her cost of ingredients, rent for her shop space, wages for her staff and other expenses such as utilities.

By converting these numbers into percentages of her total revenue, Sarah can see that her biggest expense is rent, followed by wages and then ingredients. This helps her identify areas where she might be able to cut costs or increase efficiency.

Next, Sarah looks at her balance sheet, which shows her assets like baking equipment and cash in hand; liabilities like loans she took out for her bakery; and equity, which is essentially what’s left over for her after all liabilities are paid off.

Sarah notices that her liabilities are quite high compared to her assets, meaning she has more debt than what she owns outright. This could be a red flag for potential investors or lenders.

Finally, Sarah reviews her cash flow statement that shows how much cash is coming into her bakery from sales versus going out for expenses such as rent or loan repayments.

She realises that although she’s making a profit on paper according to her P&L statement, she doesn’t always have enough cash on hand because some customers take time to pay their invoices while she has immediate expenses including wages and ingredient purchases.

By understanding these three key financial statements, P&L statement, balance sheet and cash flow statement, Sarah gains valuable insights into her bakery’s financial health, something that helps her make informed decisions about managing costs, seeking investment, or even expanding her business.

As you can see, finance is not something to be afraid of, but something to embrace. By boosting your financial skills, you can talk the talk, walk the walk, and show your worth. You don’t need to be a maths whiz to master the basics of finance; you just need to learn the lingo, know the metrics, and play with the numbers. All of these skills are bound to make you a better business leader – and will equip you to make more informed business decisions.

Amol Maheshwari is the managing partner and M&A head at Growth Idea. Previously, a vice-president at Morgan Stanley, Maheshwari has more than 20 years’ business and investing experience. Regarded as one of the leading authorities in business financial mastery, he has an MBA and is a CFA charter holder. His new book, Score: Master Opportunities, Avoid Mistakes & Build a Financially Successful Business, written alongside entrepreneur and founder of Growth Idea, Shweta Jhajharia, is a deep dive into the financial skills that business leaders need for lasting success

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