Financial Acumen for Managers
You'll want to build your financial acumen to succeed as a business leader. Managers must understand the terms, concepts, and key documents to build these skills. If you want to move from the project' war room' to the board room - your first step is to learn beyond the project basics of cost, scope, and time management.
What you need to know about
Understanding the Impact
Speaking with the C-Suite
Making Informed Decisions
What is Financial Acumen?
Corporate Finance works differently than private investing. But if you invest, you know the importance of understanding a company's strategy and which projects they choose to invest in.
Growing as a leader includes learning the concepts companies use to make decisions and assess if the strategic direction is yielding the right results. Why might you want to increase your knowledge of Corporate Finance?
Giving you a seat at the table: Understanding financial reports helps you confidently speak about profitability, liquidity, and solvency. These key concepts relate to your client or company's overall financial stability. Understanding your business's direction and the industry's economic drivers helps you be informed when using these terms. And make good decisions about resource allocation, budgeting, and strategic planning.
“Accounting is the language of business. It tells the story of a company’s financial health and its ability to generate profits.”
Identifying Areas of Improvement: Financial reports highlight key performance indicators and financial ratios that can help managers identify areas of improvement within their team, project, and company. By analyzing these reports, managers can identify inefficiencies, cost-saving opportunities, and areas where revenue can be increased. This information allows managers to implement strategies to drive growth and improve overall financial performance.
“If you can’t measure it, you can’t improve it”
Making Informed Decisions: Financial reports provide insights into the company's financial position, allowing managers to make informed decisions about investments, expansions, and new projects. By understanding the financial implications of these decisions, managers can evaluate potential risks and rewards, ensuring that they align with the company's overall goals and objectives.
Communicating with Stakeholders: Financial reports are essential for communicating the company's financial performance to various stakeholders, including investors, shareholders, lenders, and regulatory authorities. Managers must understand these reports to communicate the company's financial standing, prospects, and potential risks or challenges to stakeholders. Identifying why a project is important and how it will help your bottom line will build trust and confidence in your leadership and business skills.
Compliance and Governance: Managers are often responsible for ensuring compliance with financial regulations and governance standards. By understanding financial reports, managers can ensure that the company's financial practices align with legal and regulatory requirements. This includes accurately reporting financial information, maintaining proper internal controls, and adhering to accounting standards.
“Good business leaders create a vision, articulate it, passionately own it, and relentlessly drive it to completion.”
8 Financial terms Project Managers should know
These terms are key, so learn to use them correctly. See my examples to help you get a feel for the concept.
Revenue: The income from sales, services, or other sources. It represents the total amount of money earned by a company or individual.
Example: A retail store earns $50,000 monthly in sales revenue from direct product sales. And another $5,000 in billable costs for client projects. This gives a total monthly revenue of $55,000.
Expenses: The costs incurred in running a business or completing a project. It includes various expenditures such as salaries, rent, utilities, and supplies.
Example: A software development company incurs $10,000 monthly expenses, including employee salaries, office rent, and software licenses. And may have another $2,000 allocated in estimated engagement costs and taxes. Their total costs for the month are $12,000.
Return on Investment (ROI): Measures the profitability of an investment by comparing net profit to the initial Investment.
Example: Suppose you invest $10,000 in a business venture, and after a year, the venture generates a net profit of $2,000. The ROI would be (2000/10000) * 100 = 20%.
Profit Margin: The profit percentage earned from each sale or business transaction. It measures the efficiency and profitability of a company.
Example: Let's say you have a company that sells a product for $100, and it costs you $70 to produce that product.
To calculate the profit margin, you would subtract the cost of production @ $70 per unit from the selling price @ $100.00 per unit. The profit margin is then calculated by dividing the profit by the selling price and multiplying by 100 to get the percentage. In this example, the profit margin is 30%. This means that for every dollar of revenue generated, $0.30 is profit based on the following calculation
Profit Margin = (Profit / Selling Price) * 100. Profit Margin = ($30 / $100) * 100. Profit Margin = 30%
Cash Flow: The movement of money in and out of a business or project over a specific period. It reflects the liquidity and financial health of an entity.
Example: A small business receives $5,000 in cash from customers and pays $3,000 for monthly expenses, resulting in a positive cash flow of $2,000.
Break-even Point: The point at which total revenue equals total expenses, resulting in neither profit nor loss. It indicates the sales or business activity level needed to cover all costs.
Example: A manufacturing company has fixed costs of $10,000 and variable costs of $5 per unit. If each unit is sold for $20, the break-even point would be (10000/(20-5)) = 666.67 units.
Opportunity Cost: The potential benefit or value foregone when one alternative is chosen over another. It represents the cost of the next best alternative that is sacrificed.
Example: Let's say you have two investment options - Option A offers a 5% return, while Option B offers an 8% return. By choosing Option A, the opportunity cost would be the 3% return you could have earned with Option B.
Business Case: A business case is a document that outlines the justification for undertaking a business project or initiative. It provides a clear and structured argument for why the project is necessary, what the expected benefits are, and how it aligns with the overall goals and strategy of the organization. A business case typically includes the following elements:
Problem Statement
Objectives
Benefits
Expected costs
Risks
Outcomes
Example: The new CRM system is expected to increase sales conversion rates by 15%, reduce customer churn by 10%, and improve customer response time by 30%.
Learning the basics of Financial Management is a great start. But once you know these terms how do you use them to help you read and understand financial reports? I will cover that in my next article.
