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Financial Literacy – the key to your career success

10 April 2016 | Published by AME

Master financial jargon

Financial jargon rears its ugly head everywhere.

  • You are reading the news and they use that word: Net Asset Value – what does that mean?
  • You are applying for a car loan and they ask for your statement of assets and liabilities? What is that? How do I do that? I need an accountant!!
  • An investment advisor comes to see you. He wants to help consolidate your debt and put you into something that will yield a high inflation-adjusted rate of return. Huh?
  • You’re sitting in the sauna at the gym and the sweaty man next to you asks what you think of the budget speech and it having little effect on the deficit? Excuse me?

Finances are an unavoidable part of everyone lives. If the conversation is always ‘over your head’ and you break into a hot (or cold) sweat when the topic arises – you need to embrace and master financial jargon.

Embrace Financial statements

Accountants read financial statements in the same way “normal people” would read a storybook. The statement of financial position (formally known as the balance sheet), the statement of comprehensive income (formally the income statement) and the cash flow statement tell a story, albeit a number story.

The accountant can tell what changed in the business in the current year, whether it was profitable, whether it generated cash, what acquisitions were made, where the business struggled and a lot more.

This is certainly a skill worth developing.  Whether you’re a business owner, a manager, an employee on the path to financial success or merely in charge of your personal financial story – wouldn’t it be extremely useful to have the numbers tell you a story – a meaningful story that you could work with?

Once you are able to read the full financial story you can start making the much-needed changes and start planning for the future.

It’s a relatively simple skill to develop – the skill of reading financial statements and, it can only stand you in good stead wherever you’re heading in your business career. You may trust your accountant or bookkeeper – and that’s fine. But, at the very least empower yourself to read and understand the story they present you with.

Know the time value of money

When tackling a project or embarking on a new business venture, you are going to thumb suck what the venture will yield a year from now, two years from now etc.. etc..

If you don’t adjust for the time value of money, your numbers will be skewed, as a rand today is not worth a rand tomorrow.

Returns have to be adjusted for inflation.

Many people do not account for the time value of money when embarking on new ventures and do not account for the cost of the time value of money when getting into debt.

Many investment advisors convince their clients that they have made them healthy returns when in fact the opposite is true.

Simply adjusting for inflation could reveal negative returns.

It’s worth learning the skill of calculating the time value of money and factoring that in to decisions that affect your work life and personal life. The cost of living is continually escalating. Make sure you are planning accordingly.

Profit planning

Many businesses sell and market a number of products. But, each product has different mark-ups and margins, different input costs and different volumes.

Analyse your product mix regularly to see which products are your real profit drivers and which products are eating at your resources that could be more effectively deployed.

Ensure you are getting the right price for your product by doing constant market comparisons. If the market is pricing you out of certain products, cut those lines and focus on the winners, unless those products are loss-leaders.

By constantly focusing on the margins of specific products and specific divisions, you will have the tools at your disposal to make informed decisions at any point in time. Some simple tweaking here and there could see a product take off.

Also, take stock of your monthly fixed costs or indirect expenses.

Are those expenses eating at your margins? Could you outsource certain functions, cut back on rent, telephone, electricity? Constantly entertain solutions that can help you save on monthly costs to that your net profit margin remains as high as possible.

Cash flow Management is Key

You’ve heard the saying: “Cash is king”

Well.. it is! You can have the most fantastic profits but if you haven’t collected cash from customers and you aren’t managing cash effectively, your business may not be quite as healthy as you think it is. It can happen quickly. A supplier can’t wait any longer to be paid. Staff who haven’t been paid threaten action and all of a sudden the business is in business rescue.

Keep an eye on the following as often as possible and you’re well on your way to building some good cash flow habits:

  • Only sell to qualified customers – put your customers through a credit check before giving them credit
  • Follow up on your debtors regularly and make sure they pay. This is the biggest downfall of many a business – not allocating the right resources to follow up on outstanding debtors.
  • Analyse your debtors ageing for long-outstanding debtors and take legal action if required.
  • Pay creditors only when they become due and payable.
  • Take advantage of settlement discounts if you have spare cash available at the time.
  • At any point in time you should know who owes you and who you owe
  • Put a plan in place should you need short-term or long-term finance. You need to have a plan of action if a big customer goes out of business or stops buying from you.
  • Try spend within budget unless something out of the ordinary happens which merits a significant diversion from the budget.