If you are going to start a business, or are looking to become part of an existing business’s senior team, then financial understanding is a must. However, for many business people, novice or otherwise, this can be a terrifying prospect.
Funders (banks, private equity managers etc.), accountants and other financial professionals have a tendency to use a substantial amount of technical terminology that the average owner manager is totally unfamiliar with. Phrases such as; gearing return on capital employed, PE ratios or the acid test sound like a foreign language from a distant land.
Unfortunately, not everyone feels confident in admitting their ignorance of such matters. When faced with the language of finance these people can quickly be blinded by the plethora of jargon and succumb to ‘nodding dog syndrome’ in an attempt to avoid looking less educated than their counterparts.
A good quality adviser should of course be aware of, and indeed sensitive to, this issue in its wider sense. Sadly, too many financial people have inadequate emotional intelligence and insufficient communication skills to deal with such matters in the right way.
Therefore, it falls to the owner manager themselves to firstly find out what questions they need to ask and secondly to learn to do so without fear.
To help you make a start on improving your understanding of your own finances, here are our top four questions to ask your accountant when they provide you with your management or year-end figures:
- Where is my profit if it isn't cash in the bank?
- How many stock / WIP / debtor / creditor / days have I got? What does that mean in terms of cash tied up in the business?
- What is my monthly break even number in pounds and pence?
- Is my liquidity improving? (So that you don’t get stumped with their response this means: have you more available cash to spend? Whether they answer yes or no, ask why so you know what action to take.)
These questions won't make you an FD, but they should help you improve the performance of your business and stay abreast of any financial issues that could arise.
For further information on this topic, please see Jo’s book: The Financial Times Guide to Finance for Non-Financial Managers which is available to buy here.
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