In the face of shifting business paradigms and organisational complexities, financial literacy could mean the difference between success and failure, according to Professor Mark Graham, head of the College of Accounting at UCT.
Graham says that too often the need for non-financial personnel to understand financial statements and financial jargon is not realised, and organisations suffer as a result.
“Finance is the language of business – and you’re not going to understand your business unless you understand what the numbers are telling you,” he says.
“In today’s constantly changing marketplace, no matter what type of business you’re in, you need to be able to prepare for and confront change as it happens.”
Graham said that there are four cornerstones to financial understanding.
Finance your business correctly
It is important to realise that the way you finance your business can impact its long-term profitability.
Although it may seem obvious, your business is sure to fai unless you construct a financing plan without incurring unmanageable debt.
Through debt or equity – borrowed money or your own – getting the right balance of how you are financing your business will determine its success.
What do you buy?
Deciding which assets – property, equipment and other items of value that will benefit the business in the future – to buy, is important to ensure that it moves in the direction you want it to.
Being able to read a balance sheet will help you with this, as it will indicate which assets can help your business and which won’t.
What are your options for assets, and how do you choose which ones to go with? Unless you can read the language of finance, you might find yourself making the wrong choices.
Manage your assets
The day-to-day running of a business also requires careful financial strategy.
Understanding your financial statements will give you an idea of where you are making money and where you could make some improvements, and then help you to choose the best options.
Once you have determined the best assets to invest in, profit and cash has to be made. This is the area that business thinking and strategies generally operate in.
Find the right balance
As you make cash, you need to determine the best options on spending it.
How much do you keep for yourself, and how much do you plough back into your business?
Too often businesses fail because they overextend themselves without preparing for the future, or risk stagnation by not taking calculated risks.
Professor Mark Graham is the programme director of the UCT Graduate School of Business Finance for Non-Financial Managers programme, which starts in October.