Financial-Intelligence

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FINANCIAL COMMUNICATION

CAPITAL CONSIDERATIONS

FINANCIAL STATEMENTS

FINANCIAL SCORING

FINANCIAL INTELLIGENCE

PERFORMANCE MANAGEMENT

DECISION MAKING

Smart enough:

To get—and use—Common Sense.

To understand you can’t spend the same dollar twice—So, spend it wisely the first time.

To realize that Knowledge is not the end result. Power comes from the APPLICATION of Knowledge.

To ascertain the difference between ‘knowledge’ and ‘education’, and use it to your advantage.

To learn that business, like a coin, has two sides—Money and People.

To leverage the use of other’s knowledge and experience.

To appreciate the Value of ‘Going the Extra Mile’.

To benefit from ‘Setbacks’ and ‘Defeat’.

To budget your Time, your Energy and your Capital.

To organize your thinking.

To develop ‘Definiteness of Purpose’.

To employ the ‘Cooperation of Others’.

To seek Inspiration.

To control ‘Your Attention’—Stay on Course.

To Give Effectively

To Master the ‘Art of Leadership’.

To demand ‘Diligence’ of yourself

To inspire the action of others

To realistically set the ‘Expectations of Others’.

To solve problems—Before they occur.

To encourage and empower others.

To plan ‘Strategically’.

To expect ‘Things to Go Wrong,’ and be prepared to handle them when they do.

The List goes on; however, the two dozen ‘THINGS TO CONSIDER’ above point you in the right direction in answering the question.

There is a vast difference between ‘Financial Knowledge’ and ‘Financial Intelligence’. Financial Knowledge implies Awareness. Financial Intelligence implies Action.

Financial Intelligence can then be expressed as the ability to navigate from Awareness to Action, (by means of, and use of, financial information) to achieve targeted results.

Business is a lot harder than most people think, or they are led to believe. The number of failed businesses and the continuing escalation in bankruptcy rates testify to that sobering fact. The inescapable fact is: Most Businesses Fail. The question is—WHY?

Is it a lack of knowledge or available information?

Jack Covert and Todd Sattersten in their book, THE 100 BEST BUSINESS BOOKS of ALL TIME, reveal a staggering statistic. “11,000 Business Books are published in the United States every year. Placed one on top of another, the stack would stand as tall as a nine-story building. And the 880 million words in that nine-story pile would take six and a half years to read. Locked somewhere in this tower of paper is the solution t your current business problem.” They went on to say, “In fact, a book publisher recently shared research with us that showed the number one reason people buy business books is to find solutions to problems.”

Obviously owners, executives and entrepreneurs are still looking for answers; and businesses keep failing. But WHY?

A lack of information would not appear to be the case. If anything, you could argue that there is an over abundance of information. So much so in fact that it becomes paralyzing not knowing what to believe and which step to take next.

Experience with International Corporations, Small Businesses and Individuals has taught us that there are three main ‘drivers’ when considering why so many businesses fail.

•

They don’t see the Big Picture—Ignorance about the primary responsibility of top business leadership causes them to misplace their focus and ‘they end up aiming at the wrong target’.

•

They are not equipped for the Challenge—They have not acquired the necessary ‘skill sets’ to know ‘how their business is really doing’ resulting in not understanding the numbers of the business, and what they represent; so they end up ‘trusting the wrong numbers’.

•

They don’t understand the Business Paradigm (A Paradigm is an outstandingly clear or typical example of; an arch-type—Merriam Webster Dictionary)—Not recognizing the major areas of responsibility all business must be proficient in, they find themselves not knowing they are ‘off course’ and ‘not being able to correct it.’

These three oversights work together to create a perfect storm for business failure.

Understanding and controlling your business is vital for survival in today’s ever changing business environment.

Mastering the necessary skills will help you to get the right results—the ones you want to avoid business failure—by doing the right thing, in the right way and at the right time.

Understanding Financial Matters is the red thread that ties business together.

FINANCIAL

INTELLIGENCE

In Business, How Smart do you have to be?

A QUESTION TO CONSIDER...

Understanding the Big Picture

UNDERSTANDING THE BIG PICTURE

The Framework of Business

There are three (3) framework fundamentals to understanding the Big Picture and developing Financial Intelligence.

Financial Measurement—You must have a way of putting the financial information ‘in context’. Financial Measurement provides the business with a means of Navigation. It will let you know where you are in relationship to your destination—your targeted goals.

The Art of Finance & Accounting—You must be able to recognize where the Numbers are ‘hard’ and where they are ‘soft’. Finance and Accounting must needs rely on estimates and assumptions. Being able to identify where ‘ART’ has been applied to the Numbers, and how different applications yield different conclusions, prepares you to put all the numbers in context. Having done so, you are in position to challenge, and question if necessary, your actions and results. Acquiring these skills enables you to answer the question, “How is your Business really doing?”

The Business Paradigm—You must understand business’s major areas of responsibility: (Every business must be proficient in these 7 areas to avoid failure.)

1. Administrative Functions

2. Financial Controls

3. Managing the Physical Assets

4. People (Personnel, Customers, Vendors, etc.)

5. Marketing and Sales

6 Research, Development and Training

7. Networking

Each area must be monitored, analyzed and evaluated constantly to maintain ‘control of the business’. Monitoring, analyzing, and evaluating the Numbers will tell you when you are off course, and if so, how and where to make the corrections to get back on course. Consequently, you do not waste as much Time, Energy and Capital by making better decisions.

The Challenge

THE CHALLENGE

Financial Understanding—What Do You Need to Know?

The Challenge in avoiding business failure is gaining an accurate understanding of the financial information regarding your business. Without it sustained success is virtually impossible.

There are three (3) main areas of competency that must be clearly understood and mastered.

The Three Financial Goals

Converting Profit into Cash

‘SEA’ Management

THE THREE FINANCIAL GOALS

All businesses must make a profit over the long haul. According to Peter Drucker, “Profit is the sovereign criterion of the enterprise.” Many people in business don’t understand what Profit really is, and that it is comprised of multiple assumptions and estimates. They also do not understand that you cannot spend Profit. Mastering the INCOME STATEMENT will enable you to understand Profit.

All businesses must generate adequate Cash to meet their Current Liabilities, and establish sufficient liquidity reserves to service Long Term Liabilities and maintain solvency over the long term. Lou Mobley stressed that “you can operate for a long time without Profit, but you can’t operate one day without Cash.”

All businesses must yield a satisfactory return on investment to shareholders. If a business cannot demonstrate competitive returns, it becomes extremely difficult to obtain new investment dollars or financing from banks and financial institutions.

PLEASE NOTE! These three (3) Financial Goals correlate to the Three Bottom Lines in Business:

1. Net Profit

2. Operating Cash Flow

3. Return on Assets

CONVERTING PROFIT INTO CASH

In today’s economic environment the old adage that ‘Cash is King’ is no longer viable. Today, ‘Cash Flow is King’. You may have a reserve of Cash today and events unforeseen may render it worthless tomorrow. A business must have means of a continuing Flow of Cash into the company. Some businesses are taught how to manage Profit; few learn how to manage Cash Flow. Cash Flow is the lifeblood of any business, according to Chuck Kremer and Ron Rizzuto, in their book, MANAGING BY THE NUMBERS. They correctly assert that “if a small company runs out of Cash it dies. For large companies, Cash Flow is the best way to test the QUALITY OF EARNINGS. It tells you whether the abstract profits recorded on the INCOME STATEMENT are being converted into real money”.

They point out that the key test of a business’s Cash Flow health is its Operating Cash Flow. When financial analysts survey a business they apply four (4) Tests to the Operating Cash Flow (OCF):

Is OCF positive?

Is OCF greater than Net Profit?

Is OCF greater than fixed asset investment?

Is OCF trending in the same direction as Net Profit?

Operating Cash Flow will tell you how well you are converting Profit into Cash.

‘SEA’ MANAGEMENT

In all simplicity, the responsibility of executive management in business, from a financial point of view, is to manage SALES, EXPENSES & ASSETS (SEA), so that the company hits its financial targets.

The Three Indispensable Business Tools, and their respective foundation in Finance and Accounting , provide the best means of managing SEA.

The Break Even Point (And ROI calculations)—Based upon the area of study in Finance and Accounting we call Cost Tracking or Expense Analysis.

Financial Ratios—Based upon FINANCIAL STATEMENTS.

Variance Reports—Based upon your Budget.

These three (3) tools will allow you to compare your performance with your own operating history, Industry averages and your competitors, as well.

PLEASE NOTE! It is important to remember in managing SEA, that Profit is a ‘SOFT NUMBER’, while Cash Flow is a ‘HARD NUMBER

The Business Paradigm

THE BUSINESS PARADIGM

Areas of Responsibility& Red Flags

The Business Paradigm is comprised of both responsibilities and red flag warnings.

In addition to the Seven (7) Areas of Responsibility listed above, Owners, Executives and Entrepreneurs must comprehend THE SPIRAL EFFECT, its red flags and warning signs.

THE SPIRAL EFFECT is a downward spiral that results in business failure.

THE BEGINNING:

It all begins when a business (1) does not aim at the right target, (2) does not know where it is at any given point in time, and (3) has no way of knowing when they are off course, or how to make course corrections.

THE FIRST STEP:

The first step in the downward spiral is the creation of a SITUATION, or

ENVIRONMENT, where the business wastes Time, Energy and Capital because of their errors described above.

THE SECOND STEP:

The second step is the formation of A PROBLEM. A Situation, or Environment, where a business consistently realizes losses in time, energy and capital fosters CONFUSION. The business begins to work against itself. The Problem has a specific Cause—Not Knowing What To Do, or How To Do It Consistently.

There are four (4) Reasons Why The Problem arises:

LACK OF EDUCATION—They have not been taught.

LACK OF TRAINING—They have no way of knowing when they are missing it.

LACK OFCORRECTION—They have no way of knowing how to make things right.

LACK OF INSTRUCTION—They have nothing to help them stay on the right course.

THE THIRD STEP:

The third step is resulting OUTCOMES. Just as Decisions have Consequences, unsolved Problems have Outcomes. “Not knowing what to do, or how to do it consistently, results in ‘Hit or Miss’ Outcomes”. Hit or Miss Outcomes are disastrous to business, because they compound Confusion. You keep searching for what works and end up wasting more Time, Energy and Capital.

THE FOURTH STEP:

The fourth step is diminishing Cash and Cash Flow Reserves. Wasting Time, Energy and Capital, depletes a business’s Liquidity and compromises its Solvency. Together they formulate the ‘Fatal Flaw’ which ultimately leads to Business Failure.

THE FIFTH STEP:

The fifth step is Bankruptcy Protection, or eventually Closing the Doors of the Business.

PLEASE NOTE!

Mark Twain once remarked, “Inherently, each of us has the substance within to create whatever our goals or dreams define. What is missing in each of us is the training, education, knowledge and insight to use what we already have.”

The Solution to the SPIRAL EFFECT is to find a Tool, or Set of Tools, that will provide the Training, Education, Knowledge and Insight you need to avoid business failure. That Tool, or Set of Tools, should , in a nutshell, provide you with the following: