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WHAT WE KNOW FOR SURE – Part 3 – Financial Pressure

October 27, 2020 by Ken Vermilion 2 Comments

We posted COVID, STRATEGY, AND WHAT WE KNOW FOR SURE about a week ago. Here are some further comments and observations about the second “known.”

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Gee, about a year ago, things were simple. Put together a good strategy and ride it into the future. Sweet!

BAM! COVID-19! >>>>> FINANCIAL PRESSURE WILL INCREASE!

OK, it’s obvious that financial pressures have and will increase. The question you might want to dig into is “So, how much should I, a non-expert but an up-and-coming leader, need to know?”

See if the following list list makes you nervous. If so, start learning just a wee bit more about the magic stuff (money) that keeps your business running.

Profit and Loss Statement

  • Net Sales
  • Cost of Goods Sold
  • Merchandise/Product Margins
  • Net Profit
  • Cash vs. Non-Cash Items
  • Accrual Reporting vs. Cash Reporting
  • Variance Analysis
  • Are you really making money? How much profit does the company make on $1 of revenue?

Balance Sheet

  • Types of Assets
  • Types of Debt
  • Owners Equity

Cash Flows

  • Operating
  • Investing
  • Financing

Meaning of Basic Financial Ratios

  • DuPont ROE Model
  • Return on Investment
  • Return on Sales
  • Return on Assets
  • Impact of Leverage/Borrowing

Budgets

  • How to Budget
  • Variance Analysis

Don’t get snowed as the world changes around you. Financial literacy is needed at ALL levels of leadership.

Filed Under: Covid-19, Finance Tagged With: covid-19, finance, future

A Middle Managers Guide to Finance

May 2, 2020 by Ken Vermilion Leave a Comment

What is Financial Management?

Today’s post for A Middle Managers Guide to Finance provides middle managers a quick outline of financial management.  And, hopefully, in a manner that is relatively painless.  Feel free to comment at the end of the post!

I’m going to guess that as a middle manager, you probably await finance reports that signal to you and your manager how your part of the business is performing.  These reports may come from the accounting department and report current performance data compared to some sort of budget/plan and last year.  I’m also going to guess you probably dread the annual planning/budget exercise.  And when your CFO talks about the company’s performance, “What did the CFO just say?” is the question of the day. 

Just what is Financial Management and how much do I need to know about financial management to do my job?  Isn’t all that finance stuff the CFO’s problem?

Financial Management starts with Financial Managers and their high level Goals/Responsibilities.  In a general abbreviated format, financial managers have the following responsibilities:

  • Financial Planning and Analysis – These responsibilities refer to activities related to forecasting future business results, ensuring company goals can be achieved and putting pencil to paper to measure whether or not forecasted goals were actually achieved.  Financial management professionals also kick the tires on new endeavors; again ensuring the returns fit company expectations.  A great deal of accounting data supports these activities.
     
  • Asset Management – Here, Asset Productivity could be the description as well.  Financial management looks at the returns being generated on the investment in assets, e.g. cash, inventory, people, technology, equipment and buildings.
     
  • Overall Financial Structure – The financial structure refers to managing the amount of cash and debt the company uses to operate.  This activity also determines how new assets, e.g. buildings, will essentially be paid for or financed. And whether or not new equity (shareholders money) should be raised in lieu of borrowing additional cash. 

Your company’s financial reports are rooted in accounting data and reports subjected to Generally Accepted Accounting Principles (GAAP). These principles are generally accepted set of accounting principles. Standards and procedures issued by the Financial Accounting Standards Board (FASB). GAAP and FASB exist to bring reporting standards of financial data in such a way that enables comparisons to be made between company’s reports and to provide clarity and consistency. 

To be a successful middle manager, you must have a grasp of fundamental financial management concepts in order to “walk the talk” about financial performance levers under your control. Understanding the fundamentals of finance help you ask the right questions if performance is either too good, on target or slipping. Understanding the fundamentals also helps you make business adjustments where needed. 

Key pieces of this financial foundation include performance analysis and asset management.  Yes, mathematics is involved! Financial concepts involving the time value of money, ratio analysis, cost of capital, return on investment, profitability, valuation, price elasticity, etc. will be covered in future posts. 

So, what does this mean to middle managers? Breathe easy. You won’t be asked to develop spreadsheets to augment your decision-making tool kit or to develop the metrics for valuing the purchase of new equipment or additional inventory.  Financial professionals will perform these activities.  

But you need to possess a high-level understanding of financial management concepts, especially when preparing budgets or requesting additional resources.  Financial managers want to know resources are being applied efficiently in your business and are producing expected returns, all based on how they measure productivity and performance. And guess what, you want to know, too! My goal will be to provide you this understanding foundation as we move through other financial management posts.

If you can’t demonstrate an understanding of basic financial management concepts, you will be left in the dust. Another middle manager who can engage the finance department will make off with your resources while someone else reorganizes your operations. Enough said.

Reflect back on the post related to cash for a minute.  If you were able to follow through with the Career Momentum suggestion at the end, you better understand the connection between the people and activities under your supervision and their connection to cash sources and uses.  Plus, you now are on a first name basis with your new best friend, the financial manager attached to your business-operating unit. (Seriously, having the finance manager on your side is invaluable!)

A final word about reporting. Typically, there are internal financial reports, external financial reports and management performance reports.  Each serves a different audience and therefore contains different types of financial data. Most meaningful to you will be understanding the genesis and underlying financial concepts related to management performance reports used to evaluate your business’s performance.  

Career Momentum Builder 

Ask your supervisor to share with you their point of view regarding the keys to their management performance reports, usually produced by the accounting department monthly or quarterly.  What’s most important? How does your operating unit fit into these reports? Are there performance targets to be attained this period? How can you be more helpful in attaining these targets? Is there a role you can play during the next planning cycle?  

Filed Under: Finance, Middle management, Uncategorized Tagged With: GuideToFinance

A Middle Manager’s Guide to Finance – Cash

March 26, 2020 by Ken Vermilion 4 Comments

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Source: VisualHunt

The phrase Cash is King is frequently used when educators begin imparting business management wisdom upon unsuspecting students or when owners of family businesses prepare others to assume owner responsibilities. Understanding how cash flows through your company will definitely enhance your strategic thinking skills.

Cash is the vital fuel used to run the engines of business. Simply put, cash enables business.  Enough said.

The management of cash is crucial to the successful business.  Cash flows into the business from a number of sources, e.g. cash sales, accounts receivable collections, and loans.  Cash is used a number of ways in business and therefore flows out of the business, e.g. buying materials, clearing accounts payable, paying back loans, and paying employees or shareholders. Plus, strong predictable cash flow helps businesses negotiate favorable financing terms.

Cash is also an asset and should be subject to standards of productivity.  A company needs enough cash on hand to meet the demand and should be collecting cash quickly and efficiently.  Therefore, cash is subject to budgets and forecasts.  To facilitate the reporting of cash in (sources) and out (uses) Cash Flow Statements are prepared.  Middle managers are rarely involved in the aforementioned activities/reports.  Managers in accounting, finance and treasury keep their fingers on the pulse of cash inflows and outflows as well as cash on hand for the company CFO. 

However, middle managers can and do influence cash flows.

Think about it.  Most everything around your department has something to do with cash.

The building, office furniture and equipment, electricity used to provide light and run the equipment, supplies, etc. were put in place by some sort of cash transaction.  The same can be seen in a warehouse or a doctor’s office. 

Now, let’s think about the nature of your business.  Does your company sell products? Does your company make the products or buy the products to resell.  Both models require maintaining an inventory of product.  Think about inventory as cash waiting to happen. 

Take a moment to think about your role in the company’s need for cash or exchanging goods or services for cash.  Are there activities that could slow down or reduce your company’s need for cash without compromising employees, customers or shareholders?  How could you or your department’s activities accelerate the collection of cash?

Add understanding of how cash flows through your company as an additional decision-making lens for managing your department’s activities.

A final note; cash is not the same as profit.  Cash is the fuel for business. Without it companies will fail.  However, cash does not make the multiple moving parts of business work effectively or efficiently.

A car makes a great analogy.  Keep your eye on the fuel level and make sure your not going to run out before the next gas station. But gas alone does not keep the car moving forward. You need to understand how the car works.  Business is the same. 

My advice, keep an eye on how your activities impact the level of cash in the fuel tank and know what you are looking at when you raise the hood! 

Career Momentum Builder – For the next few days, view your activities and your department’s activities through the cash flow lens.  Make some notes identifying whether or not cash is being used or generated. Have a discussion with your finance manager about your department’s impact on cash and listen to their point of view regarding the possibility for cash flow improvements.

Filed Under: Finance, Middle management Tagged With: GuideToFinance, middlemanagement

A Middle Manager’s Guide to Finance – 1

March 8, 2020 by mindprep 4 Comments

VisualHunt

Ken Vermilion

3/8/2020

Understanding the world of corporate finance in a big company can be daunting.  And if you’re not in the management chain that ends with the Chief Finance Officer (CFO), you might wonder if middle managers really need to bother themselves with the language, strategic thinking skills and, perhaps the most daunting, the math of corporate finance? 

The answer may be “no” if you’re comfortable in your middle management position and don’t aspire to move up the ranks or know that your job will never be eliminated. (Note: I don’t believe the last situation exists anywhere in corporations today.  Do you?) 

Wouldn’t it be nice to understand the fundamentals of finance enough to be able decode the CFO’s presentation to shareholders at the annual meeting or the written analysis reported in the company’s annual report, to understand what your finance manager’s thinking about regarding your piece of the business, or to know how your work fits into the overall financial success of the company?  I’m going to go out on a limb and say “yes”, you would like to understand the fundamentals, but in terms applicable to your position in the company and in terms you can easily digest.

The goal of this blogging series is to present the fundamentals of finance in a format suitable for non-financial managers interested in learning more about financial management in order to help them advance in their careers.  (Note: Heck, your newfound knowledge and language might make you a candidate to participate in future strategic action planning exercises!)  

You will pick up the fundamental language of finance and be better positioned to understand what makes your company tick, financially.  Most importantly, you will be positioned to know how your activities contribute to the financial goals of the company and be able to ask important/thoughtful questions about your department’s financial performance.  Your understanding of fundamental finance will assist you in developing the skills needed to “lead from the middle.”

For a start, you will learn about the importance of cash (some things obvious and some things not so obvious), the fundamental financial statements and how they integrate, an analytical framework for comparing elements of the financial statements to determine how the business is doing, basic financial analysis that can help in complex problem identification/solving, and how I like to read through annual reports. You will also be able to ask me questions to help further clarify concepts.  Together, we can expect to have some fun with finance.  And I promise never to use a lemonade stand or fruit vendor to make a point, not that there is anything wrong with doing so. 

So, stay tuned to this space to prepare you for the future. Use the reply button to actively participate in the journey this blog can provide you!     

Career Momentum Builder – I will close each blog post with a Career Momentum Builder.  The builder may simply be something to think about in the context of your job accountabilities.  Or a very short, emphasis on very, assignment that relates to the current blog or the blog post that will appear next. The MindPrep Resource Center was formed with one goal in mind: to help emerging leaders progress and succeed in their careers.  This blog is driven by that commitment.

Filed Under: Finance, Middle management

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