If you’re not working in your company’s finance department, you might not think you need to know anything about finance. You may not even be privy to the financial statements. Regardless, a few financial nuggets can increase your knowledge, enhance your working relationship with your boss and help you contribute to the company’s bottom line.
Your boss may not take the time to train you in these areas, but don’t be afraid take the initiative yourself. Your new insights could lead to some enlightening conversations. Your boss may find that they have a new sounding board – you! These tidbits may come in handy the next time you’re making that budget request or wondering what in the world management was thinking.
1| Profits are more important than revenues.
Whether it’s a big sale or record annual revenues, it’s important to celebrate these milestones. Obviously, you can’t have profits without first earning revenues; however, there’s more to the big picture. Revenues are secondary to the profits they generate.
Sales volume and profit margin are two contributors to profits. In addition to achieving adequate sales volume, it’s critical for a company to price their offerings appropriately. This way, they can cover not only the cost to make the product or deliver the service but also to cover overhead expenses, make payroll and save up for the future. Likewise, keeping production costs and other expenses as low as possible is key.
Are there ways you can cut costs for your department? Is it possible to maintain the quality of your product but produce it for less money? Are you missing opportunities to increase sales volume or profit margin? These are all thoughts that your boss – and you – should constantly be considering.
2| Cash flow is critical.
Cash flow refers to the collection and spending of funds. Both the amount of money you receive and the timing of receiving it determines your buying power for any given time. Cash flow obviously impacts your ability to make necessary purchases. Unfortunately, when cash flow is off, your business may be forced to take out a loan or delay plans altogether.
Cash flow is why companies benefit from their customers paying up-front versus thirty days after the sale. It’s why companies pay their own bills on the due date – or even pay it late. Vendors sometimes offer a discount for paying early – again, it’s all about cash flow.
Many factors impact cash flow, but one worth noting is seasonality. Some companies make the majority of their profits during just a few months of the year. For examples, ski resorts cash in during the snowy winter months; waterparks, on the other hand, have their boom during the summer. The holiday season often yields a big cash infusion for many businesses. If anything goes wrong during the company’s peak season, it can upset plans for the rest of the year, if not longer.
Have you noticed many companies adding product subscription services lately? For example, you purchased a new automatic soap dispenser. After your one-time purchase, the company is likely to promote their soap refill subscription plan. It’s an excellent alternative to buying soap in bulk in exchange for free shipping. Whether it’s razor blades, socks, vitamins, trash bags, air filters or high-end wardrobe selections, subscription plans provide a boost for ongoing cash flow! You don’t forget to buy the items on time, and the company makes an automatic sale even if you didn’t need the refill yet.
How can you improve your company’s cash flow? Are there ways to encourage customers to pay in advance or up front? For big expenses, can you negotiate to pay the vendor incrementally throughout the year rather than upfront? Are there ways to up-sell existing customers with accessories for the products they’ve already purchased? If you’re in a seasonal business, how can you diversify your product or service offerings to add something during the down season? For example, some winter ski resorts convert to summer hiking resorts during their off-season. Brilliant!
The next time you’re making a budget request, consider cash flow. Do you need to tweak your request to ensure that it aligns with the cash flow needs of the business?
Take this learning opportunity even more steps forward.
Think about how you can engage your boss or your peers in conversations about these topics. Learn how they specifically apply to your company and to your department. Your boss should appreciate your interest in the bigger picture and your enthusiasm to contribute to the company’s success. Put the information to good use. Let it inform your goals so that they are meaningful, measurable and contributing to the bottom line.