As a non-finance manager, there is a tendency to be ignorant about finance. I remember recurring conflicts between field managers and the financial controller at my last workplace. The field managers will blame the accountants for being oblivious to their work and not knowing how difficult it is; the financial controller will argue that they cannot work in the field without him. I have learned that to be an effective manager, you must be familiar with the organisation’s critical operations and be educated in finance management. What you cannot measure or control; most of the essential measurements you need to make a decision is in finance. The application of finance goes beyond the office and businesses; It’s also relevant in self-management and home management.
Have you heard the word “Car is a liability” before? If you have and believe it is true, you need basic finance knowledge. There are five key accounts- Assets, Liabilities, Revenue, Equity and Expenses.
Assets are anything you own or control that can provide the business with current or future economic value. There are existing and non-current assets. Current assets are assets you can sell as it is, use up, consume up or convert to goods or services, and realise as cash or it is cash. Non-current assets are precisely the opposite. So, your car is an asset, not a liability. Other examples of assets are inventories, receivables (money you are owed after providing the services), short-term securities, land, buildings etc.
Liabilities are any debts or obligations in the short term or long term. This is also divided into two: current liabilities and non-current liabilities. Current liabilities are short-term debts you must pay back within a year or 12 calendar months. Non-current liabilities are debts that you are obligated to spend beyond one year. Examples of liabilities are long-term loans from the bank, payables (Money you owe a supplier after the supplier has supplied you with the goods), and wages owed to the staff.
Revenue: It is the total amount of income generated by the sales of goods and services directly related to the primary operations of the business. If my company sells clothes, and I decide to sell off some of my inventory items, it will not count as revenue.
Expenses: An expense is a cost the business incurs to run the business. It is divided into direct expenses and indirect expenses. Direct expenses are expenses directly related to the production of goods, while indirect expenses are expenses associated with maintaining and running a company. For instance, in manufacturing, your raw materials, diesel cost, the salary of guys working in the factory, and depreciation of that factory for that year are all examples of direct costs because, without them, you cannot produce. However, salaries of the accountants, buying stationeries, diesel for running the admin etc., are indirect expenses. Direct expenses are also referred to as the cost of goods sold.
Equity: This is the funds injected into the business by the owners, either at the start or to continue the business.
EVALUATING A FIRMS’ PERFORMANCE