Why You Should Grasp Financial Basics

"Finance is boring" is often the excuse made by people who don't really know that much about it, or that "it's the accountant's job". True enough in both cases sometimes, but it pays (literally) to grasp some rudimentary knowledge about the ins and outs of how finance works in business.

"Finance is boring" is often the excuse made by people who don't really know that much about it, or that "it's the accountant's job". True enough in both cases sometimes, but it pays (literally) to grasp some rudimentary knowledge about the ins and outs of how finance works in business. In fact, even if you're not-for-profit, it IS the business. No money means no business, no business means that you don't have a job.

A lack of financial knowledge will leave you struggling to make decisions based on financial implications, and possibly lose control of the accounts (that's before the accountant gets near them!). Even if it's just learning the jargon of finance and what businesses have to keep tabs on, a bit of knowledge will go far in making you stand out as a better qualified, knowledgeable employee.

Most businesses (sometimes including those operating as a sole trader) have legal obligations to report their finances to Companies House in the UK. This means both an annual return (basically, a check if any details have changed, such as the board of directors), and the accounts. If you don't submit them on time, you are fined. The business accounts are a public document that anyone can access, which sometimes surprises some people. Finance is therefore, open to scrutiny to anyone interested, not just the elite shareholders. Sloppy or omitted finances look bad and reflect negatively on the company - an even better reason to understand them yourself.

There are some basic elements in finance that you should be familiar with. Profit and loss are two words that most folk know the meaning of, but not strictly how that relates to accounts and the financial year (which begins every April, by the way - not in January). The two separate terms of profit and loss should be examined carefully - some things you can deduct from your profit and be a GOOD thing. For example, if your company pays travel expenses for staff, then this is something that was done for the good of the business. This makes it an operating cost, and can be deducted as an expense to the business and therefore taken from profit - with the advantage being a deduction from tax on the company's income. Everyone should familiarise themselves with a balance sheet because these details are what cause profit and loss to fluctuate in what they really mean.

Knowing how cash flow works will help you to budget much better in your role, usually no matter how small. For example, if you company is VAT registered, you can claim the tax back on purchases, whereas a non-registered company cannot. You can control costs better by knowing how much capital can go so far.

The first step to improving your knowledge of finance is to take a course, or ask the accounting department of your company - when they're not busy accounting. Most people will not freely admit such a gap in their knowledge, it's embarrassing to admit that you can't tell cash flow from turnover, yet you have heard of both, right?

Better financial knowledge always means better financial control. Not just in business, but the skills you learn can be transferred to your own personal finances to help you manage them more effectively, so the advantages are clear - knowledge, after all, is power!