Why Is Business Finance Hard To Understand – Part III

We left off the last part talking about business owners and managers needing to focus on the three core business finance objectives and tie them back to the overall objectives of the organization.

Before getting into a deeper discussion about each of three core business finance objectives, lets briefly return to the initial discussion that business finance is hard to understand.

Yes, it is hard to understand finance as much of it tends to be based on some pretty heavy and involved math, conditions, and principles.

Yes, finance is an essential part of society and commerce.

No, it is not important to become a finance expert.

But to become an effective business manager and own or run a successful business, then you have to be able to put finance and finance providers to work for in a manner in which you know what’s really going on.

That’s where the following three core business finance objectives come in:

– Secure Capital
– Manage Cash Flow
– Cash Out

And if you haven’t already guessed, these objectives are the entire focus of this blog and all future posts.

All finance related functions and activities can be listed under one or more of these three objectives or categories.

This is effectively a point of interface between the managers and owners of a business and the various finance personnel or professionals they have to work with.

The focus here is develop a “common set of finance objectives” that both finance and non-finance trained individuals can understand and work towards together.

Lets look at each on of the core business finance objectives in more detail.

Secure Capital.  Virtually any business, at some time, will require some amount of capital to operate.  There can be rare exceptions, but indeed they would be rare.  An organization that has clear goals will have to further expand goals into strategies and tasks that are assigned dates in a time line and costs to complete.  The collective value required from all costs is capital it needs to secure.

This objective is an offshoot of budgeting and accountants, connects to banking and bankers, investors, and so on.

Manage Cash Flow.  Every activity, action, or decision of a  business has two things assigned to it:  time and cost.  When is going to happen, when did it happen, when will it be completed.  What will it cost, what has it cost so far, what is it expected to cost, and so on.

Cash flow is the life blood of any business.  Without a positive cash flow over time, there basically is no business.  So everything that happens, past present, and future is summarized into cash flow management, providing a dashboard of results to whoever is driving the business bus.

Finance functions like taxation, foreign exchange, accounts payable, accounts receivable, purchasing and inventory, capital expenditures and so on, all impact cash flow.  Summarizing all these activities into cash flow management reporting and providing organizational goals and objectives for overall financial performance provide the basis for all these activities to be managed and measured… without being a business finance expert.

The key is to provide end goal direction in terms that everyone can understand.  The finance people seldom understand the intricacies of marketing, sales, and operations no better than non finance people understand finance.

The same is even more true with outside advisers like accountants and bankers and tax specialists who actually tend to know very very little about the inner workings of their clients’ organizations.

But these outside advisers can still provide tremendous value to a business if they are properly directed via the three core business finance objectives.  Without this direction, many business managers and owners simply leave the decision making up to the advisers which in many cases is dangerous to deadly.

The last core business finance objective, “Cash Out”, may sound simple and straight forward, but its importance can’t be overstated.

We’ve all heard how you need to work with the end in mind.  Its all about working towards a longer term goal or objective, right?  Well I use the term “Cash Out”  to signify the ultimate end of the business.

People are in business, primarily, to develop a cash flow, build assets, and build enterprise value for some day in the future when the business will be sold or transitioned to others for an optimal price.

The “cash out” objective is like the rudder on the ship, where when the end game changes for whatever reason, the entire enterprise needs to be shifted to accommodate the change in final destination.  Because the long run of business is ever changing, and truly organic in nature, short term linear courses are plotted to operate in the short term (otherwise you couldn’t operate at all) and as time goes by and more information is known, or impactful things come to light, or trends develop, or whatever that can influence what you do and how you do it in the market place.

Then a course correction is made.

The course correction is about making the adjustments required to continue on a path to optimal enterprise value that will someday be completely financially realized in some sort of exit.  It is inevitable.

As companies grow and fragment into different operating centers, each may take on a life of its own and work towards different ends.  But the most successful companies that consider the synergies among the pieces, will further wind up all these outcomes into one master exit plan to further guide the ship or perhaps fleet.

The point here is to always have a clear picture of where you’re headed and how you plan to get there.  Over time, you will refine the picture and continually bring unclear things into focus.  This provides the basis for all experts and functions, finance and others, to line up their efforts towards helping the enterprise achieve its goals.

The coordination of organizational activities across functional lines is nothing new.  I’ve just gone a bit further and simplified the collective process into the three business finance objectives:

Secure Capital
Manage Cash Flow
Cash Out

While much of the coordination and optimal use of business finance practices evolved out of big company structures and thinking, the principles apply to small and medium sized businesses as well.

Regardless of size, you need to have a strong handle on these three core objectives and by doing so, you can make sure business finance is working for you and likely providing you with a competitive advantage over those who either view this as too much work or are giving themselves a headache trying to understand everything about business finance (and we now know that would be a very poor use of time)

More to come in the next installments

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

Business Finance

Why Is Business Finance Hard To Understand – Part II

In part I, we started into the discussion of why business finance tends to be difficult to understand for most people, even though its relevant to everyone to some degree.  Now, let me get into how this relates to you as a business owner or business manager.

I left off talking about the apparent communication gap between finance tacticians and the rest of the world.

I also mentioned how when you’re in business for yourself or managing business for others, you can be very much at the mercy of your advisers when it comes to matters of finance.

Does this mean you shouldn’t utilize advisers?  No, I’m definitely not saying that.  Experts in various financing disciplines can be absolutely critical to your business success.

So, lets summarize what we know so far.

–  Business finance can be hard to understand, comprehend, and apply.
–  Its an essential part of any business venture
–  Leaving too much decision making up to your advisers can be dangerous.
– There is a long standing communication gap between finance experts and  everyone else.
–  99.9% of the world have a very limited understanding of finance, how it works, and how they can more effectively utilize it to increase their wealth.

From a business ownership/management point of view, there should be a strong motivation to correct this trend, and I think there is, but few people understand how and continue to muddle through what already doesn’t work very well.

So what’s the solution?

Like anything else in business, the owners and managers of any business need to control and direct the forces of the business to be successful.  When it comes to finance, its hardly practical to advise or expect non financial managers to develop a deep understanding of business finance in order to get greater value.

Most Entrepreneurs will have a primary focus on marketing, which they should as marketing is the #1 most important activity in a business.  But finance is #2 , and is the counter balance for marketing.  Look at any large scale business and see how they’re organized – marketing on one side, finance on the other.

So the answer is not to become expert at something you may not be good at or have an aptitude for (basically going against your wiring).

The answer lies in your approach and commitment to maintaining the necessary chi like balance between #1 and #2.

Can I have a drum roll please.

The secret to optimizing the finance component of your business is to connect all finance activities  into the three core business finance objectives that apply to any and all businesses regardless of size, structure, or country of origin and then make sure they are congruent and supportive of the overall business objectives of the organization.

Wow, that’s a mouth full.  And hardly more enlightening at this point.

But stay with me as all will be explained in the next segment.

I will reveal these three core business finance objectives in part III and further explain how they relate to the broader organizational objectives (and show you that its not even that hard to do once its been explained in a little more detail).

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

businessfinancespecialist.com

Why Is Business Finance So Hard To Understand? Part I

“Let’s Discuss Some Of The Challenges That Come With Trying To Figure Out How Business Financing Works”

Have you ever got a sharp pain behind your eye or gone instantly into a comma from trying to make sense of almost any information written on business finance or any finance application for that matter?

I have.

And I’m a finance guy, or at least someone formally trained in finance, and I get the same headache.

So what’s the deal with this?  Is is really so hard to understand and does it have to be so unfun to read and digest?

In fairness to my fellow egg heads, there is a fair amount of complexity to the actual math associated with finance and finance theory. Add to that the business finance disciplines like taxation, accounting, treasury & foreign exchange and you end up with some really mind blowing stuff that 99.9% of people have no interest in whatsoever.

So why bother with it all?

Well, because its essential.   Essential to us both personally and commercially.

I mean we live and work and play in a society that is based on a capitalism model which requires money for exchange of goods and services which requires finance systems to operate.

And in the business world, every single business must have some proficiently in finance, or there won’t be much of a business, certainly not a very profitable one.

So, on the one hand, everyone needs to understand and apply finance to some degree.  But on the other hand, the technicians that understand the topic frankly suck at explaining what we need to know in relevant, applicable terms.

Thus, we have a knowledge gap which starts right in the public school system.  You can graduate from high school without being shown how to write a check, balance a bank statement, or receive any basic instruction on the responsible use of credit.

If you go to secondary school, you may or may not get exposed to a whole lot more, depending on what you take.  Even if you go into a business school, or even a business masters program, the amount of directly applicable information you may receive can be quite small.  You’ll learn a lot about finance theory and accounting practices, and taxation strategies, and you’ll be provided with lots of big company examples with lots of complex corporate examples that 99% of the people would never be exposed to in their life time.

Then, when you venture out on your own, you will follow one of three paths related to finance: 1) you will get an unrelated job and learn through trial and error how to get a mortgage, a car loan, a credit card, and a line of credit; 2) you will pick a finance related discipline and learn a great deal about that particular aspect of business finance, but still be dumb to most of the rest of the subject matter; 3) you go into business and live at the mercy of your advisers (accounts, tax specialists, bankers, brokers, lawyers) who will hopefully know what their doing for what you pay them and know how to apply their knowledge to your real world baby.

Basically, we live in a world where there is an enormous gap between the technical finance knowledge holders and the rest of us making up 99.9% of the population.

While there is no shortage of information available, most of it is just not all that useful to the average person of average intelligence who does not have any special interest in finance

If it sounds like the system is broken, it is.

So what’s the solution?

Stay tuned for more in part II

Click Here To Speak Directly To A Business Financing Specialist