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Understanding finance for the terrified

Many novice businesspeople, or even more jaded operators, don’t have a great understanding of finance. 

Funders, accountants and other financial professionals have a tendency to use a substantial amount of technical terminology that the average owner-manager is totally unfamiliar with. Gearing return on capital employed, PE ratios, the acid test and the like sound like a foreign language to the untrained ear. 

Unfortunately not everyone feels confident in admitting their ignorance of such matters, and can quickly be blinded by this plethora of jargon, picking up a nodding dog syndrome in an attempt to avoid looking stupid.

A good quality adviser should of course be aware of this and indeed sensitive to this issue in its wider sense. Sadly, too many financial people have inadequate emotional intelligence and insufficient communication skills to deal with such matters in the right way. Therefore it falls to the owner-manager to find out what questions they need to ask and to do so without fear.

Here is my top list to ask your accountant when they provide you with your management or year-end figures.

  • Where is my profit if it isn’t cash in the bank?
  • How many stock / WIP / debtor/creditor / days have I got and what does that mean in terms of cash tied up in the business?
  • What is my monthly break even number in pounds?
  • Is my liquidity improving” This will impress them with your knowledge of the word, what it means is have you more available cash to spend. Whether he answers yes or no ask why so you know what action to take

These tips won’t make you an FD – but then I am sure it’s not a role you will particularly covet. BUT they should help you improve the performance of your business.

Jo Haigh is head of FDS corporate finance services and the author of ‘The Financial Times Guide to Finance for Non Financial Managers.’

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