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Importance of finance literacy

The success of any business depends on several factors such as Revenue, Profits, Cash Flow, Assets and so on. Many business professionals have only a vague idea about these terms, due to which they are unable to fully comprehend the financial impact of their decisions and also contribute fully to the success of their respective organizations.

The webinar conducted by Blue Ocean Academy on the topic ‘10 Key Reasons Why Financial Literacy is Important for Every Professional’ gave a broad Overview of Finance and Accounting with insights into Financial Statements and what they convey and why every key executive needs to be aware of these areas to be successful in their career.

Following are the important points discussed in the webinar:

Stakeholders in a Business

Business is an activity of manufacturing, buying and selling goods, or providing services for profit. Every business has a number of internal and external stakeholders. The decisions of these stakeholders have an impact on the organization.

  • Employees: They want to ensure that the organization sustains and makes profit. An organization survives because of its excellent employees.
  • Management: Managers play a substantial role in determining the strategy of the organization and take operational decisions.
  • Owners: Owners are the individuals who hold significant shares of the firm. They are liable for the impacts the organization has and have a significant role in strategy.  
  • Suppliers and banks: Organizations rely on external stakeholders like suppliers if they have to buy raw materials or need other services. Banks are also the external stakeholders as all organizations cannot survive with their own money.
  • Customers: Customers can make or break the business. The main goal of organizations is to satisfy the customers.
  • Government and other authorities and regulatory agencies: Government and regulatory agencies control organizations and ensure that they comply with the rules and regulations.

Top 10 reasons for having financial literacy

The key task in business is taking decisions and every role calls for decision making. Higher the hierarchy, the bigger the impact of decisions. The availability of reliable information, especially of the monetary kind, is inevitable for efficient decision-making. You need financial literacy to be a better decision-maker. Following are the important reasons that state why you should have basic knowledge of finance:

  • Understanding accounting reports

The information required to make decisions is in the financial reports which can be difficult to understand for the individuals who don’t have sound knowledge in finance. They must be able to evaluate and understand the main reports like Profit & Loss Account and Balance Sheet.

  • Revex and Capex Budgets

Professionals need to understand the difference between revenue and capital expenditure. Capital expenditure involves acquiring or improving permanent assets not meant for sale. On the other hand, revenue expenditure is the money spent in the normal course of business and includes the cost of sales and maintenance of fixed assets.

  • Preparing cost-benefit proposals

A cost-benefit analysis is a process that businesses use to analyze decisions. The business or analyst sums the benefits of a situation or action and then subtracts the costs associated with taking that action.

  • Working capital management

Working capital is a financial metric which represents operating liquidity available to an organization. You should ensure that your role doesn’t have a negative impact on the working capital management of the company.

  • Managing accounts receivable

Collecting money from customers is critical to the survival of any business. Many managers struggle to achieve the right balance between achieving sales targets and managing receivables.

  • Understanding bonus and incentive schemes

Individuals must know the components that are considered in their bonus and incentive schemes.

  • Understanding how inventories or stocks are valued

In many companies, inventory represents a large, if not the largest, a portion of their assets. The assets need to be accurately valued so that the company as a whole can be accurately valued. 

  • Resource allocation or prioritization of projects

Organizations have limited resources. So, the approval of projects is done on the basis of various methods like pay back, DCF, NPV, and IRR. IF you don’t know these methods, you cannot state why your project must be approved.

  • Costing and cost management

Costing is the determination of costs for the products/services sold by a company. Cost management aims to improve a company’s profitability by managing, controlling, and eliminating expenses.

  • Ability to deal with finance and accounts department

Most importantly, you can confidently deal with the finance and accounts department when you have a clear idea about the finance concepts.

Training in finance can improve your knowledge in these aspects and help you to make better decisions and contribute positively to your organization.