Being a leader requires a whole range of skill sets. A great leader will have the ability to wear multiple hats, employing different skills as different situations arise.
Understanding finance and having the confidence to work with money is invaluable to a leader’s arsenal.
An understanding of finances will help leaders have a greater understanding of the business on a holistic level.
Financially savvy leaders will make smarter decisions within the workplace, better communicate with stakeholders and make greater professional and personal advancements.
Here are the financial skills that can empower leaders to take their role to the next level.
Understanding Financial Statements
Understanding financial statements are fundamental. Being able to read and process certain financial documents will enable leaders to measure the overall health of a company and make better decisions.
Three main financial statements that can be used to empower leaders are:
- Balance Sheet: A document that shows the overall finances at a specific time. It should show the resources and assets the business owns and how they were financed.
- Income Statement: This document summarizes the earnings of the organization. The sheet states revenue minus expenses over a period of time.
- Statement of cash flows: This document shows the cash generated and spent during a time frame. Generally, these statements are broken down into three sections: Operating activities, investing activities, and financing activities.
By being able to understand these financial statements, leaders can make better-informed decisions.
Financial statements can help leaders know where to attribute more or fewer resources, which in turn will lead to empowered leadership.
Ratio Analysis
Before you can use financial statements to inform your decisions, you need to be sure you understand what they mean. Financially savvy leaders will understand that ratios are important in businesses.
Similar to how a deposit for a home loan and its repayments need to be calculated before committing to the loan, business leaders must understand the business’s position before making financial commitments.
Financial ratios allow leaders to add meaning to the numbers by providing comparability across the company over time.
Four ratios to know:
- Liquidity: Ratios that measure the risk of your business running out of cash.
- Profitability: Ratios that can be used to assess your company’s earnings.
- Leverage: Ratios that examine how much of your organisation’s assets are financed by debt
- Productivity: Ratios that gauge how well your firm uses its assets to produce output.
Deciding what ratio to use will depend on what you’re trying to measure. For example, liquidity ratios attempt to measure a company’s ability to pay off its short-term debt obligations.
This is done by comparing a company’s most liquid assets, those that can be easily converted to cash, with its short-term liabilities.
Understanding these ratios and how to make these measurements will give you a greater understanding of the business’s financial position, which will empower your choices.
A leader who can make financially wise decisions, keep to a budget, and limit unnecessary spending, will be invaluable to the business.
Leaders who can balance the costs and returns of projects, including factors such as tax and depreciation, will be empowered to invest in the projects which will have the most benefit or be the most advantageous.
Forecasting
Finance isn’t just about reviewing the current numbers but using the data you have to make future forecasting.
To make smart financial decisions, leaders must be able to examine current projects and assets and determine how their value will change in the coming months.
If you know how to use data to predict trends and financial outcomes, you can determine the benefits and drawbacks of a specific project.
Understanding
Having a fundamental understanding of finances in a business setting is crucial for leaders.
Leaders who can read financial statements, utilize financial ratios, and provide effective forecasting will be well-equipped to make good business decisions.
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