1000 Business Lessons Every Businessman Must Know

Chapter 56 Financial Knowledge: Without Financial Knowledge, You Can’t Be a Good Boss

Chapter 56 Financial Knowledge: Without Financial Knowledge, You Can’t Be a Good Boss
459. Who is the target of financial management

As a boss, you must be clear in your heart, who is the object of financial management?Financial management is mainly fund management, and its object is funds and their circulation.

The starting point and end point of capital circulation is cash, and other assets are the transformation forms of cash in circulation. Therefore, the object of financial management can also be said to be cash and its circulation.

Financial management also deals with cost, revenue and profit issues.

From a financial point of view, costs and expenses are expenditures of cash, and revenues and profits are sources of cash.

Financial management mainly studies cost and income in this sense, and is different from cost management and sales management in the general sense, and also different from accounting work that measures income, cost, and profit.

460. Recognize the concept of cash flow

When establishing a new enterprise, two problems must be solved first: one is to formulate a plan to clarify the content and scale of operation; the other is to raise some cash as the initial capital.Without cash, business plans cannot be realized and operations cannot be started.After the establishment of the enterprise, the cash is turned into various assets for operation, which are gradually turned into cash during operation.

In production and operation, cash becomes non-cash assets, and non-cash assets become cash. This cycle of circulation is called cash flow.It has no beginning and no end, and it continues to circulate, also known as the circulation of cash or capital circulation.

Cash circulates in many ways.For example, some cash is used to buy raw materials, which are processed into finished products, and the finished products are sold and then turned into cash; some cash is used to buy fixed assets, such as machines, etc., which gradually wear out during use, and their value enters the product. Successively converted into cash through product sales.Various circulation paths complete a cycle, that is, the time required to start from cash and return to cash is different.Cash for goods can flow back in a few days, and cash for machines can take many years to return to cash status in full.

The circulation of cash into non-cash assets and then back to cash, which takes no more than one year, is called the short-term cycle of cash.Assets in the short-term cycle are current assets, including cash itself and inventories that can be completely converted into cash during the normal operating cycle of the enterprise, accounts receivable, short-term investments, and certain deferred and prepaid expenses.

The circulation of cash into non-cash assets and then back to cash takes more than one year, which is called the long-term cycle of cash.Non-cash assets in the long-term cycle are long-term assets, including fixed assets, long-term investments, intangible assets, deferred assets, etc.

461. Cash flow of profitable businesses

Profitable companies that do not intend to expand generally have relatively smooth cash flow.Its cash flow in the short-term cycle is generally balanced. The net profit after tax makes the company have excess cash, and the depreciation and amortization in the long-term cycle will also accumulate cash.

Profitable companies may also experience temporary liquidity difficulties due to the withdrawal of excessive cash.For example, paying dividends, repaying borrowings, updating equipment, etc.In addition, inventory deterioration, property theft, bad debt losses, losses from the sale of fixed assets, etc. will cause the company to lose cash and cause an imbalance in turnover.However, profitable businesses usually do not experience serious financial difficulties without massive expansion.

462. Cash flow of loss-making enterprises

From a long-term point of view, the cash flow of loss-making enterprises is impossible to maintain.From a short-term perspective, it can be divided into two categories: one is enterprises whose losses are less than the depreciation amount, which can survive before the replacement of fixed assets; Bankrupt soon.

For an enterprise whose loss is less than the depreciation amount, although the income is less than the total cost, it is greater than the cash payment, because depreciation and amortization do not need to pay cash.Therefore, it is usually not difficult for them to pay their daily expenses, and they may even draw out part of the cash to compensate for depreciation expenses for other purposes.However, when the depreciated fixed assets reach the point where they must be replaced, disaster strikes.The accumulated cash is not enough to replace fixed assets, because the income of the enterprise cannot fully compensate the value of all assets when it loses money.At this point, the only way out for the treasurer is to try to borrow money to buy equipment to keep production going.This method can only solve the temporary problem.It increases the cash outlay for the following year, which further increases the loss of the enterprise.Unless the company turns losses into profits, it will become a company with "losses greater than depreciation" and will soon go bankrupt.If such companies cannot turn losses into profits in a short period of time, there is another way out, which is to find a profitable company that is interested in reducing the tax burden and be merged by it, because merging a company with a book loss can reduce the tax burden of a profitable company .

463. Cash flow of businesses on the brink of bankruptcy

A company whose loss is greater than the amount of depreciation is on the verge of bankruptcy.Such businesses cannot sell products for more than what they paid out-of-pocket, let alone cover non-cash expenses.The financial directors of such enterprises must constantly add cash to the short-term turnover, and the amount is equal to the cash deficit.If the fixed assets are to be replaced, the required cash can only be raised from outside.Generally speaking, it is very difficult for them to find sources of financing from outside.Lenders won't make loans if they don't see a guarantee of repayment, and homeowners won't risk putting more money into it.Therefore, if such enterprises cannot turn losses into profits in the short term, it is better to declare bankruptcy as soon as possible.Such enterprises often do not even have the value of being merged by other enterprises to reduce the tax burden of the entering enterprise.The purpose of investing in companies is to reduce taxes and reduce cash outflows. If the companies that are included in the company need to inject cash every year, it will violate its original intention.

Expand your business' cash flow.Any business trying to scale up its operations rapidly will run into a pretty serious cash crunch.Not only does the investment in fixed assets need to expand, but also increases in inventory, accounts receivable, and operating expenses will increase cash outflows.

464. External reasons affecting the cash flow of enterprises

Seasonal changes in the market.Generally speaking, the production department of an enterprise strives for balanced production throughout the year to make full use of equipment and labor, but there will always be seasonal changes in sales.Therefore, companies often run out of cash during off-season sales and accumulate excess cash after peak sales seasons.

There are seasonal changes in the cash outflow of enterprises for procurement, especially for enterprises that use agricultural products as raw materials.Centralized procurement and uniform consumption make the inventory quantity change periodically.There is a large amount of cash outflow during the peak purchasing season, and the cash inflow cannot increase at the same time.

There will also be seasonal changes in the expenses of enterprise labor and other expenses.Some companies focus on paying bonuses at the end of the year, which requires a lot of cash; some companies use holidays to work overtime and pay double wages; some companies use seasonal temporary workers, and labor costs increase greatly during this period.

Treasurers need to prepare for these changes in advance and leave appropriate leeway.

economic fluctuations.The speed of economic development of any country will fluctuate, from fast to slow.

When the economy contracts, sales fall, which in turn reduces production and purchases, reducing funds throughout the short-term cycle, and businesses have excess cash.If the downturn is predicted to last for a long time, the replacement of fixed assets will be postponed, and the accumulated cash for depreciation will also increase.This financial situation gives a false impression.With further reductions in sales, large operating losses will soon ensue, and cash will be gradually wiped out.

When the economy is "hot", the demand for cash expands rapidly, and the excess cash accumulated is quickly exhausted. Not only does it require a large amount of cash to expand inventories, but also encouraged by the optimism during the boom, companies will make expansion investments in fixed assets. And often more than the depreciation taken.At this time, most banks and other lenders are also optimistic and willing to provide loans to profitable enterprises, and it will not be too difficult to raise funds.However, overheating of the economy will inevitably lead to a rise in interest rates, and over-expanded enterprises bear a huge interest burden and will be the first to be hit by economic contraction.

inflation.Inflation can make it difficult for businesses to run out of cash.Due to the increase in the price of raw materials, the cash required to maintain inventory has increased; the cash payment for labor and other expenses has increased; the increase in selling prices has increased the funds occupied by accounts receivable.The only hope for businesses is that profits will also increase, otherwise, cash will become increasingly tight.

Improving profits is nothing more than increasing revenue and reducing expenditure.Increase revenue, limited by market competition.If companies do not reduce costs, it will be difficult to cope with the financial difficulties caused by inflation.The unbalanced cash flow caused by inflation cannot be solved by short-term borrowing, because it is not a seasonal temporary cash shortage, but the purchasing power of cash has been permanently "eroded".

compete.Competition can adversely affect a business' cash flow.However, competition is often forced, and business operators have to adopt policies they did not want to take.

Price competition will immediately reduce cash inflows to firms.The winning party in the competition will recover its losses by selling more products, in fact speeding up its own turnover by sacrificing the interests of other companies.The loser will not only suffer the loss of falling prices, but also be hit by reduced sales, and the cash flow may be seriously unbalanced.

Advertising competition immediately increases the cash outflow of the business.The best outcome is that advertising boosts sales and accelerates cash flow back.If competitors also make marketing efforts, corporate advertising can only stop the decline in its sales.Sometimes advertising doesn't stop sales from falling completely, just less.

Adding new products or after-sales service items and using soft methods to compete will also increase the company's cash outflow.

(End of this chapter)

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