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Financial Concepts Simplified

Posted by on 3. January 2013

It’s the start of the New Year.   A lot of people have included being able to save in their resolution.  Saving does need some Financial know-how and some have deemed finance, accounting and related fields as rocket science.  Oh wait it is, we have a set of Accounting Standards that changes by the minute and has continued to evolve to adjust with the time.  The disclosure requirements have become more transparent which has made the financial statements balance from a 10-20 pages to about a 100 pages  document.  Don’t worry, I’m not here to bore you with details but this should simplify those difficult parts into meaningful snippets.  Leave the part that keeps people nose bleeding to us.

Spend less than what your earn

The object of most business is to generate income and here’s a simply concept. Spend less than what you earn.  Easier said than done and the difficult part is how to measure it.  A key measure would be the income statement which goes by the formula income less expenses.  Expense may come in form of a related product or service cost, administrative cost and selling expenses. To increase income here are some drivers

  • Increase revenues or find alternative revenues
  • Generate cost savings in the product and administrative cost.  Find big items and determine unnecessary expenses.
  • Selling expenses must come with a desired forecasted profits. If you have to spend make it matter.

Work on a budget

Nothing beats a good plan and a budget is a plan with numbers.  How much sales can it generate?  What are the expenses to be incurred? How much profits are expected?  In other words, you have to have your desired income statement based on your assumptions about the business.  Develop strategies to ensure help the plan/budget be achieved.

  • Always compare actual results with budgeted figures and identify the variance (Actual – Budget)
  • Get explanation on why there are variances with budgeted figures and identify persons who are responsible for the variance.
  • Develop strategies to meet the budget or adjust as necessary but important to keep people accountable.

Keep Liquid

One problem of small businesses is that they don’t segregate personal funds from business funds.  Treat any business as a separate entity even if its a small one.  One way of knowing you’re earning is that your cash resources are growing. Ideally, a business should operate on its own generated funds so if you keep putting in additional money, there maybe a problem or you’re spending too much.

  • Keep personal separate from business funds.
  • Additional cash from owners may be an indicator that the Company is not earning.
  • Account for all cash transactions and implement controls

Maximize Floats

One way to preserve cash is to maximize floats or maximizing the use of credit.  Take the example of a credit card, I can buy something and pay for it within a month instead of outright cash.  Of course, there’s a disclaimer here, spend only to the extent you can pay when the card is due.  Of course, it’s important that you have means to pay or else credit card surcharges can kill you.

  • Use credit when it’s available and at a reasonable rate;
  • Spend only on something you can pay when it is due.
  • Interest can really be a burden especially credit card interests.

Think Long Term

Allocate a portion of what you earn to savings.  Think long term. Invest if you can.  If you are risk appetite is high, try the stock market.  If not, it’s safe to go with time deposits and placement.  The key is to limit free cash.  It’s easier to spend with too much cash around and it’s also doesn’t earn you anything.

In a Nutshell

Whether you’re handling a big, medium or a small business or even your personal finances, it’s important to learn some key finance concepts.  Sometimes, we get intimidated by too much of the technical part of it but it’s always nice to know how to measure the performance of your business and take the next steps from there.

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