Dear CEO,
As earlier discussed, unless you are keeping track of the numbers in your business, you won’t know how to improve it. Every aspect of business is impacted by finance. It establishes your annual budget and limits the amount of staff you can hire. It is what enables you to effectively assess the success of your team while balancing short-term costs with long-term objectives. To put it bluntly, it’s what keeps your business afloat; a business cannot succeed without it’s finances strong.
Now let’s breakdown some number languages your business speaks on daily basis – Assets, Liabilities, Equity, Sales, Cost, Expenses, Income, Cash … etc
BALANCE SHEET represents the net worth of your business. It shows a snapshot of your assets, liabilities and equity.
ASSETS = LIABILITIES + EQUITY
INCOME STATEMENT aka profit and loss. It measures your revenue and expenses over a period of time.
NET PROFIT = REVENUE – EXPENSES
CASH FLOW STATEMENT tracks inflow and outflow movement of the business funds and it measures liquidity over time.
RECIEPTS = PAYMENTS.
COMPOUND INTEREST = “Interest on Interest.”
EQUITY represents the amount of money that belongs to the owners of a business after all assets and liabilities have been accounted for.
NET WORTH can be calculated by subtracting what you own, your assets, with what you owe, your liabilities. The remaining number can help you determine the overall state of your financial health.
RETURN ON INVESTMENT (ROI) is a simple calculation used to determine the expected return of a project or activity in comparison to the cost of the investment, typically shown as a percentage.
WORKING CAPITAL is the difference between a company’s current assets and current liabilities. Working capital—the money available for daily operations—can help determine an organization’s operational efficiency and short-term financial health.
Now you have understanding of the Holy Trinity of business finance. You can turn your financial chaos into order and your data into information you can analyse, review and criticize. Understanding these fundamental financial terminology can help you comprehend the value and effects of your work on the firm as well as provide you a more comprehensive understanding of your organization’s operations.
Go out and do what Smart CEO’s do with numbers, ask the right questions at the right time and predict the future of your business.