Why Understand Finance?
Finance matters to all companies because they all have to bring in money and spend it in order to do business. On the bringing-in side, smart managers consider questions like these:
• How much of our money comes from the owners? How much from sales? How much from borrowing?
• Which of our product lines and regions earn the highest profits? Which ones fail to perform?
• How long does it take to collect money that customers owe us?
On the spending side:
• Are our costs what they should be? Are we spending the right amount on our people and on our physical assets, such as office space and computer equipment?
• If we can invest in only one of several opportunities for growth, how do we determine which one would generate the most value?
• If we increased our output by 20%, would we make 20% more money?
Your company’s finance department (or bookkeeper, if it’s a very small company) produces financial statements, budgets, and forecasts. By understanding these documents, you’ll gain the information you need to ask essential questions and make smart decisions for your division, department, or team.
By the way, finance uses jargon that may be unfamiliar to you. Sometimes different terms mean exactly the same thing—profit and earnings, for example, or sales and revenue. If you’re not certain what a term means, just look it up in the “Key Terms” section at the end of this book.