Finance Roll

Your understanding and correct use of the available business tools will determine how far the business goes. Regardless of size, every business needs tools to setup, administer and properly run. Some of those tools are purely financial in nature. A fair understanding of finances is necessary for every leader regardless of profession. You ignore your financial performance at your own peril. You are able to make better, informed and calculated risks or decisions whenever you know the financial implications. Every decision you will ever make has a financial implication; it will either increase your financial position or reduce your financial balance. You should never be surprised why and how you seem not to have enough money for your needs when you are not able to monitor income and expenditure patterns. This article may not make you an accountant or finance manager but it is meant to give you a few tools that are pertinent in giving you some grounding on the subject of finances. Other business tools are covered which when made use of can maximize the potential of the business.

Business & Finance 101 - Vital Tools

1. Knowledge of Finance Basics - I will highlight the few financial tools. I also recommend such courses as Finance for Non-Financial Managers. The points below will give you a jump start and possibly give you enough appetite to go a little deeper.

• Income Statement - Sometimes referred to as Profit and Loss Statement - Profit is the money you remain with after trading or selling your merchandise. It is the sum up all your sales invoices (income) minus all costs involved in the sale. The balance is a gross profit. In situations where you find yourself without money enough to finance your costs, we say you made a loss. A loss making position will drive you out of the trading position sooner than later. Every wise CEO always endeavors to lower the costs of production as much as possible so as to make goods and services affordable and competitive in pricing. That way you are able to sell volumes which increase your profitability. A profit and loss statement will include Total Sales (T), Cost of Sales "direct" costs(C), Gross Profit (which is simply T minus C. You also have Operating Profit which is profit before interest and taxes (PBIT). When you have removed all the interest and taxes you come up with Net Profit or Net Loss.

• Cash Flow - Every business has a prerogative to generate cash. A cash flow statement will show clearly what happened to the cash you have been generating. Cash refers to "hard cash" which is Cash on Hand, petty cash, and cleared funds in the bank as well. I am saying cleared because you can not make a decision on money which is not yet reflecting as available. What if the cheque bounces, or transfer is reversed? I used to value the Profit and Loss statement more than this until I realized that this statement tells me whether I am generating cash or I am simply consuming it all up. It is important to note that even though you may be having a profitable position according to the Income Statement above, you may be using up all your cash and soon face the wrath of bankruptcy.

• Balance Sheet - This is the document that shows us our asset levels. Whenever you purchase assets for your organization, the value should be recorded as per invoice. Over a period of time the asset goes down in value (depreciates) or it may increase in value (appreciation). It is important to keep a track of this value as it helps you to know when to replace the asset. A balance sheet will inform you about the value of the business. It is tragic to judge a business by the bank balance as all that could be funds waiting to be paid out. A balance sheet includes fixed assets such as land, plant equipment, vehicles and current assets which include cash in bank, stock levels and what customers (debtors) owe. The two asset types added together give us total assets we have. It also includes the company's financial obligations (liabilities) which may be classified into long term liabilities (loans payable after long periods e.g. 5 year loan) and current liabilities (short term loans, what is owed to suppliers / creditors). In addition you need a record of all assets with their serial numbers and values in a book called Asset Register.

• Budget - This is a financial plan which shows a projection of where we expect to get funds from and where we also expect to spend. A budget is a wise inference made based on studying previous behavior. It helps the leaders to manage costs. In well managed businesses, they will not spend on what is not budgeted for. Where expenditure surpasses budget, the respective department has to answer questions such as why? How come? What can be done next time to stay within budget? A comparison of budgeted versus actual figures is always important at the end of each month. Since a budget is a forecast of future performance, there is need to know the historic performance of a company especially in the recent past with consideration of any changes in the environment. A budget can only be useful to the degree it is realistic and reflective of the economic environment the company operates in. The budget tool is a useful tool for every leader. Get everyone section, division or department come up with their own budget which you consolidate to the main corporate budget.

2. Strategic Plan and Business Plan - A strategic plan a mandatory document for the growth and development of the business. As the name suggests, it contains business strategy which encompasses, the vision, values, strategic goals and objectives and all the necessary resources required to achieve the stated goals. A strategic plan can be one year, 5 or even 10 year plan. Take leaders away on a brainstorming strategic session rather than one person sitting down to formulate a strategy without consultation. Just because you are the founder does not mean you can do it all yourself. Get external assistance to help you dream better. Your strategic plan has direct effect on future business performance. A business plan is similar to a strategic plan and it contains most of the financial documents but most importantly projections of anticipated performance in the future. Banks look at your business plan in order to give you loans for capital expenditure or normal operating income.

3. Management Information System & ICT - It is important to note that the Information Age we are operating in calls for organizations to strengthen their access to Information and Communication Technology and usage of business intelligence tools for decision making. Online transactions have become the order of the day. Your clients are not just in their office. They live on the internet. ICT is no longer just a cost center but a revenue driver. You will gain more revenue as you maximize your presence online and your efficient electronic communication. There are different Management Information Systems available commercially to meet your industry specific situation. Sometimes you may need to engage a software developer to create your system from scratch in situations where there is no solution readily available on the shelf (tried and tested).

4. Marketing and Sales Plan - You may have the most brilliant product there is on the market but without the clientele knowing about it, it will not translate into revenue. A marketing plan is meant to raise or increase your presence on the market. You strategically assess each of the product or service you provide and determine how to roll-out the awareness campaigns and launches through various media such as internet, radio, television and print media. You cannot talk of market awareness without referring to brand awareness. Your brand identifies you and leaves an indelible mark in the mind of those who see it. Your marketing team should follow a brand manual which spells out your logo, accepted fonts etc. You must always ask yourself the fundamental question "who out there needs our services and may not know about them?" This plan will help you achieve just that.

5. Human Resource Plan - You can have all the systems you need for your business and all the capital necessary for you to take off but without people to run the systems and execute the plans, business success remains a far-fetched idea. You need a sound incentive system that looks at rewarding high performers. How do you motivate and keep the employees you have? Do you have a performance management system? What are the criteria for recruitment to specific jobs? Review job specifications / expectations and perform job evaluation. Where there is no HR System or plan, employees do as they please. HR system will help you manage induction, discipline and mentorship of recruits. Love people and see how they increase in productivity.

6. Procurement Policy - Do you strategically source your inputs and stock? When you have a sound policy, you remain competitive in your market. Always avoid middleman in instances where you can buy direct from source. Avoid keeping stocks which will not move. Use the sales reports to determine what kind of products to stock. You need to setup authorization levels for procurement. You do not want to be suddenly shocked by huge invoices. This system should work closely with the budget tool. If it is not budgeted for, it will not be procured unless by special arrangement with leadership. This policy should allow for regular reporting on stock and procurement activity. That way you make informed decisions ahead of time.

7. Communication & Reporting Strategy - Internal and external communication structures can easily become the resistors for smooth flow of information and hence slowing down of decisions that need to be made timeously. As the CEO, or head of department, you need to take time to communicate vision and spell out the goals and objectives. Regular meetings with team members keeps you informed of issues as they arise not after incubation. You are able to decide on the way forward reducing any impact to the organization. In all the systems mentioned, be it financial, HR etc. there is a regular generation of reports. This tool spells out deadlines and how often reports should come out. Who is privy to which reports? A system is only good to the level to which it can give feedback to leaders for them to make informed decisions.

8. Comprehensive Corporate Profile - A corporate profile contain all the relevant information and documentation. Before companies meet you to explain your goods and services, they need to be convinced by what they see in your profile. A profile is almost like a CV of your business. Some corporates are creative enough as they make the profiles on interactive DVDs or CDs which they send out to the corporate work. Your profile would generally contain what you find on the main website of the company. It covers you background as a business, your vision and values, it also gives details of product lines you specialize in, the team's individual write-ups (miniature Cvs) which spell out skills and experience, reference sites where you have provided the services before. This document speaks on your behalf in your absence hence it has to be of high standard, something that encourages the customer to continue reading. The marketing team can be used to come up wit this plan.

9. Research and Development - The strength in every leader is the ability to manage change, to be able to run the business based on best practice and setting standards that many would want to follow. To do that a great amount of time and money must be spent on R&D. When you do this you will find out how not to do certain things, avoiding the pitfalls of others and most importantly you stay abreast with latest trends. Excellence is achieved as you continue to for the development not only of the product but of the employee who is also a producer. As you research and get knowledge, pass it on to those in your team.

10. Safety, Health and Environment (SHE) Policy - It is no longer possible to just do business without considering the impact we make on the environment. The world is going "green", eco-friendly products and processes. Before you make your packaging, consider what it does to the environment on disposal. In your production line, the safety of your employees is of utmost importance. Unsafe environments can easily be shut down by authorities. If you produce goods in filthy environment, you will endanger both the employee and the consumer. Any industry which is production oriented, manufacturing, factory, heavy machinery based processes calls for leadership to put priority on SHE. What use is your mining venture if in one minute you can lose 400 employees in a shaft? If you cannot invest in SHE, the best advice one can give change the line of business rather than risk people's lives.