Finance for non-finance managers can be a daunting subject. But with global inflation on the rise, understanding the fundamentals of finance has become more important than ever. What’s more, forecasts indicate that inflation will continue to rise in the coming years. This implies that financial decisions will have a significant impact on your company’s bottom line. So don’t let financial anxiety prevent you from making sound decisions. This blog explores the fundamentals of finance for non-finance managers, helping you confidently navigate the financial landscape, and make the best decisions for your organization.
What are the Four Basic Financial Statements?
Finance for non-finance managers is easy if understood correctly. Non-finance managers must have a fundamental understanding of the four financial statements used by businesses to report their financial performance:
- Income statement: Aids in determining a company’s profitability. It summarizes a company’s revenues, expenses, and net income or loss for a given period
- Balance sheet: Depicts a company’s financial position at a specific point in time and consists of assets, liabilities, and shareholder equity
- Cash flow statement: Determines a company’s liquidity and cash position. It showcases how cash flows in and out of a business
- Statement of changes in equity: Summarizes the changes in the shareholders’ equity due to various transactions over a given period
What are the Differences Between Revenue, Profit, and Cash Flow?
Revenue, profit, and cash flow aid in the understanding of finance for non-finance managers. The total amount of money earned by a company from its business activities is referred to as revenue. On the other hand, profit is the amount of money earned after deducting all expenses from revenue. It should be noted that a company can have a lot of revenue but not make a lot of money. Profit is critical in determining a company’s financial health. It is also crucial to continue operations, invest in new opportunities, and pay dividends to shareholders. Cash inflow and outflow in a business during a specific period are referred to as cash flow. It is essential to a company’s operations because it helps pay bills, salaries, and other expenses. A company with positive cash flow has more cash coming in than going out, whereas a company with negative cash flow has more cash going out than coming in.
How do You Calculate Key Financial Ratios
Calculating financial ratios is an important skill in finance for non-finance managers. Therefore, let’s look at some common ratios and how you can calculate them:
Profit Margin Ratio
This ratio measures net profit as a percentage of its revenue:
Profit margin ratio = (Net profit / Revenue) x 100
Return on Investment (ROI) Ratio
Helps measure the return generated by an investment relative to its cost:
ROI ratio = (Net profit / Total investment) x 100
Calculates the proportion of debt and equity used to finance a company’s assets:
Debt-to-equity ratio = Total debt / Total equity
Measures a company’s ability to pay its short-term debts:
Current ratio = Current assets / Current liabilities
Inventory Turnover Ratio
This ratio estimates how quickly a company can sell its inventory:
Inventory turnover ratio = Cost of goods sold / Average inventory
What are Some Financial Risks and How Can They be Managed?
It refers to changes in market conditions that can affect the value of a company’s investments. Therefore, it is important to diversify investments across asset classes and geographic regions to manage market risk.
The possibility of a borrower defaulting on a loan or other financial obligation is called credit risk. It is thus important to evaluate borrowers’ creditworthiness before lending and establish clear policies for credit monitoring and collection.
This refers to a company’s ability to meet its financial obligations as they become due. Keep adequate cash reserves, set up credit lines, and put cash flow forecasting and monitoring systems in place to tackle this.
The possibility of financial loss as a result of internal factors, such as fraud, human error, or system failures, can prove dire. You can combat this by implementing internal controls, policies, and procedures. Also, conduct regular audits and risk assessments.
Currency risk is associated with fluctuations in exchange rates and can impact a company’s financial performance. Hedging strategies such as forward contracts, options, and currency swaps can thus be used to manage currency risk.
How Can Non-Finance Managers Use Financial Information to Make Better Decisions
Here are some examples of how non-finance managers can use financial data to make better decisions:
Understanding Financial Statements
Finance for non-finance managers becomes easy when they learn how to read and interpret financial statements such as the balance sheet, income statement, and cash flow statement. This will assist them in comprehending the company’s financial situation, profitability, and liquidity.
Analyzing Financial Ratios
These managers should use financial ratios to analyze key financial metrics and trends such as liquidity, profitability, and efficiency. This will not only help identify areas of strength and weakness, but it will also help make informed resource allocation and strategic planning decisions.
Budgeting and Forecasting
Financial information aids a non-finance manager in making sound budgeting decisions for future expenses while ensuring operational financial viability.
Evaluating Investment Opportunities
This covers the understanding of evaluating potential investment opportunities using financial information. It allows for more informed decisions about whether to fund new projects or initiatives.
How to Make Finance Decisions with Emeritus
In conclusion, understanding finance for non-finance managers is a good thing as it helps them make informed decisions and positively impact their organizations. It is important, therefore, to not let your fear of money prevent you from achieving success. To learn more about finance, do check out these online finance courses offered by Emeritus. Also, remember that finance does not have to be intimidating; it is simply another tool in your managerial toolbox!
By Siddhesh Shinde
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