Leadership and Finances

Leadership in Real Life Series S1E4 -

It isn’t usual to talk about finances when you’re talking about leadership, rather this they talk about influence, how to deal with people, how to inspire your team and etc.These subjects are very important and you need to know about them. In another hand, in the real life, the leader is someone in charge of achieving results, so coping with finances is essential. You don't need either love finances nor be an expert, but have an overview of the financial topic will give you a tool to understand the company situation and make better decisions. Therefore, to help in this task, I summarized below a few main topics all leaders need to know.

1 - Financial Statements: Financial statements are the company's reports. The main two statements are: Balance Sheet: It is a static report, like a snapshot of the firm’s assets and liabilities at a given point in time. The BS reveals the how many patrimony the company holds, as goods, investments, vehicles, buildings, etc., and its financial situation, i.e., its capacity to pay debts. Income Statement: a dynamic vision of the company, like a video of the firm’s operations for a specified period of time. The IS reveals the company’s economic situation, that means, its capacity to generate money with profits and net margin. As a leader, you must know how to interpret these reports. It’s always important to take a long period of time to analyze, at least 12 to 24 months, to have an idea of the company’s performance along the time, especially in companies where the sales are seasonal.

Numbers can be scared sometimes, but you can have the domain about them. A better financial vision will give you an advantage as a leader, help you to get the company’s needs and boost your accomplishments.

2 - Cash Flow: Some countries consider the Cash flow a financial statement and some countries, it is interpreted as just a control.Cash flow is the net amount of cash moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing, what is important to generate money to pay debts, invest in new projects and keep safe the company’s solvency. The Cash flow is an important tool to manage the day-by-day of cash needs, forecasting a loans' time and resources' availability to invest.

3 - Key Indicators: There are a plenty of financial indicators, but we can stand out five of them. I’m not including some indicators of public companies given the focus on leaders of SMEs. Net profit: the amount money that remains in the company after pay all the expenses. Net profit margin: It’s found dividing the net profit by revenues. Net Working Capital = Current Assets – Current Liabilities. Positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out.Usually positive in a healthy firm. Liquidity: Ability to convert to cash quickly without a significant loss in value. Liquid firms are less likely to experience financial distress, but liquid assets typically earn a lower return. There are at least five different liquidity indicators, but the easier is dividing the currency assets by currency liabilities. EBITDA: earns before interest, taxes, depreciation and amortization. It can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. EBITDA is often used in valuation ratios and compared to enterprise value and revenue.

Concluding, I wanna suggest two good and easy books which can help you to increase your financial knowledge. Corporate Finance, by Berk and DeMarzo, and Fundamentals of Corporate Finance, by Ross, Westerfield, and Jordan. They have a very practical approach to finances. Numbers can be scared sometimes, but you can have the domain about them. A better financial vision will give you an advantage as a leader, help you to get the company’s needs and boost your accomplishments.