Numbers And Finance by www.SeniorLiving.Org
Knows your numbers! That should be one of the mottos of the business leader, mid level management and the professional. Recently I was reminded of this during a discussion with a peer. They had stated that their management and professional teams complained about needing to know their numbers. Why should they, since the financial department tells them the numbers anyway. This is a business attitude that needs to be corrected as these same people make decisions everyday that impact the organization’s numbers. Not understanding the basics financial numbers and why they are important lays the foundation for poor decision making.
There are many financial measurements that businesses use to understand their performance. If you are looking to determine if a particular approach or initiative is a good idea, it’s important to use some of the more common measurement calculations. Here are the standard financial calculations that every business leader and professional should know and at least understand why they are important.
Financial Analysis Numbers to Know
Breakeven Analysis: An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. The break-even analysis lets you determine what you need to sell to cover your costs of doing business—your break-even point. Heck you can use this one in your personal life.
Sensitivity Analysis: A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. For example exchange rates between Canada and the USA. Canada’s dollar drops in value (by 30 percent) you end up paying more for goods and services imported. Your ability to buy is sensitive to changes in exchange rates. Again, applies to business and your life.
Return on Investment (ROI): A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. ROI is something we should all pay attention too. No mater what you are investing in; property, equipment, a home, mutual funds, or any other item that you expect a return on.
Profitability Analysis: is a component of enterprise resource planning (ERP) that allows administrators to forecast the profitability of a proposal or optimize the profitability of an existing project. Profitability analysis can anticipate sales and profit potential specific to aspects of the market such as customer age groups, geographic regions, or product types. If you are talking succession planning, looking at new geographic models, making labour force adjustments, or adding a new product line you need to be talking profitability. Even the management team and the professional (project manager, business analyst) needs to wrap their head around profitability.
Net Present Value (NPV): is a big part of the ROI process and is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. Generally a positive NPV means that the earnings from an investment or project are greater than the costs. So the project may be a good idea. Of course a negative number means the opposite. If you are a manager, project manager or business analyst helping define business problems or find opportunities you may want to work with your financial people to understand the NPV for decision making.
Internal Rate of Return (IRR): Also called the discounted cash flow rate of return. It is a rate of return used in capital budgeting to measure and compare the profitability of investments. The internal refers to the fact that is does not calculate environmental factors like interest rates or inflation. Think of IRR as a growth rate that an initiative is expected to generate. For example, the new IT support system needed to improve productivity or the maintenance of the existing system. Both initiatives could add value but it is likely that one is a more logical choice over the other.
EBITDA (earnings before interest, taxes, depreciation, and amortization): This is the net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. This is a term and number that is used a lot in the business meeting room among the senior leadership team. Maybe even overused and misunderstood. However, chances are your company has an EDITDA in mind and that number (in percentage form) may be part of the stated strategic goals and objectives. You should know this number.
There are many other numbers to know, but in the final analysis most businesses focus only on a handful of potential calculations to determine if something is a good idea or not. If you’re responsible for business solutions recommendations, then the financial measures listed above are the ones you need to know.
I always recommend to business leaders that they train their teams on understanding numbers and what they mean, even if someone else is providing the numbers. This holds especially true for the tactical professionals who have to research and recommend solutions to business problems and find opportunities.
Hopefully, the senior management team already understands the numbers and knows how to interpret them. If they don’t, it will have a negative impact on your business.
A Special Thank You: Thanks to http://www.investopedia.com/ for providing the definitions for these financial calculations. It is website that has a lot of useful information.
