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How understanding the foundations of finance can future proof your organisation

Finance departments and their associated terminology are often kept at arms-length by many business leaders, and all too often, this can cause organisations to work in silos, with many leaders struggling to communicate effectively with finance professionals. 

Part of this problem could be caused by the common misconception that the world of finance requires an expert understanding of complicated jargon, which someone without a breadth of knowledge and experience in the area would have difficulty deciphering.  

Ultimately, finance effects every member of staff working for an organisation, as well as external stakeholders such as shareholders and investors, so the ability to grasp the language of finance at a foundational level can be the difference between a business’s success and failure. 

So what are the main ways in which business leaders getting under the skin of finance can positively impact a business? 

Better communication with the finance department

If we start right at the very beginning, understanding basic finance terminology can help create a common language between you and your finance department. 

Mutual understanding and respect can go a long way, and by establishing this two-way, effective communication channel, this can enable insightful discussions to be had and the right questions to be raised. 

In turn, this can lead to more informed, effective, decision making which can help to improve your organisation’s financial health. 

Supercharge your spending justifications 

Leaders across all departments are increasingly put under pressure to justify their spend and the bottom-line implications of their financial decisions. 

For many organisations, being able to show how financial decisions will positively effect and increase shareholder value is a number one priority.

With the ability to confidently articulate financial decisions in the boardroom, you will be able to argue your case in a much more convincing way with this foundational understanding of financial language under your belt. 

Understand the importance of ESG in finance

Environmental, Social and Governance issues are increasingly playing a key role in organisation’s decision making in relation to mergers, acquisitions, and investment.

There is an ever-increasing demand for business leaders to act responsibly, and being financially responsible is just one aspect of this. 

As the climate emergency continues to pose a threat to many businesses, and consumers continue to demand high standards of sustainability from organisations, it’s more important than ever that ESG factors are considered and linked to every business objective, especially within finance. 

In fact, recent studies have found that organisations that had strong ESG activity performed better in terms of profitability in the recent pandemic, and were in fact shielded from the worst effects of the crisis. 

Better insight into future opportunities and challenges

The ability to look towards the future and strategically plan for unforeseen hurdles is paramount in the world of finance. 

Often, when challenges arise within a business, the first thing that is identified to cut down on is forward thinking discretionary investments such as research and development and advertising. 

But by understanding the importance of long-term investments and investing in tangible assets such as brand value, leaders can identify how to cushion their cashflows from negative fluctuations. 

Effectively analyse financial performance

Once you have grasped an understanding of what metrics matter the most to your organisation, you can develop a plan of how to monitor them and make them work in your favour. 

Many companies focus on the wrong metrics to measure their performance against, and therefore fail to spot how different departments contribute towards the wider organisational profits. 

By tracking and monitoring the right metrics regularly, risks can be spotted at an earlier stage which can help to mitigate damage.  

For many leaders, taking the leap towards using financial jargon and engaging in in depth conversations with financial professionals will feel outside of their comfort zone.

But ultimately, by grasping a solid understanding of the three key aspects of finance - what to invest in, how to finance investments, and how to distribute profits back to the shareholders – this is the starting point to success.

If you’re looking to embark on a journey to understanding the world of finance, our new four day short course, Finance for Non-Financial Leaders, delivered by Professor Marie Dutordoir, will help you build strong financial foundations which will help you make sound financial decisions for your organisation. 

Blog posts give the views of the author, and are not necessarily those of Alliance Manchester Business School and The University of Manchester.

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