“The word accounting comes from the word accountability. If you are going to be rich, you need to be accountable for your money.” – Robert Kiyosaki
Simon Hulme was our guest lecturer for Entrepeneurial Finance. Although finance is often seen as something boring and difficult to understand, our class was lucky to have Simon making it all easier to understand and adding some fun to the lesson. Understanding the financials of a business help you to understand how healthy a business is financially. This holds importance for people who have got their own start-ups as well as investors that business owners might try to attract into partnerships. Financials provide you with a quick understanding of the health of a business in terms of financial performance.
We began the class learning about the Profit and Loss Statement and the different elements that effect (and sometimes don’t effect) this important financial statement. The ‘P&L Statement’ is like a photograph of a company’s financial performance. It shows the very important data such as gross profit, net profit, profit before tax which are all key to understanding a company’s profit ratios which are ultimately what investors and potential business partners will be interested to see according to Berman, Knight and Case (2008).
It was fascinating to hear the different profit margins different sectors expect. Big chain stores such as Tesco, due to the quantity of their stores and volume of products they sell operate on a roughly 2% net profit margin. The food industry enjoys a net profit margin of roughly 5 – 15% while the world’s best performing companies such as Apple and Microsoft earn a staggering 27% net profit margin.
Thereafter, Simon taught us about price structuring which is obviously very important to a business as well as it’s survival. The pricing depends on whether you are selling a service or product and where you fit in the selling chain. Are you a wholesaler or a retailer? Are you selling a service that includes materials and other variable costs to provide your service. These factors along with VAT need to be taken into account when putting a price to a product or service.
Simon’s second class was about Balance sheets and Break-Even Analysis. A Balance sheet details what a company owns, what it owes and it’s shareholder equity at a given time. The break even point of a business is where the business is not making a loss or profit. This is the point where revenue is equal to costs (both fixed and variable). This is of importance to someone starting a new business as it helps to understand the amount of products or service sold to break even.
As with all of Simon’s classes we had fun and interesting exercises to do in class. The last part of Simon’s class taught us about Financial ratios and Cash Conversion Cycles. we did also helped us learn different ratios
Although we barely scraped the surface of Finance, the classes Simon gave us were excellent for understanding different financial statements and ratios. One of my regrets with my business was that I did not have enough understanding of these matters and did not have enough involvement in the accounting side of the business. In retrospect a better understanding may have helped me with certain decisions and with planning. Unfortunately, when you are a small business with cashflow challenges and limited capital, a lot of your decisions and planning are also limited. My past experience definitely helped me to understand much of the terminology and terms used in Finance, but I am glad to now have a better understanding overall.
Bibliography:
Berman, K., Knight, J. and Case, J. (2008) Financial intelligence for entrepreneurs at you really need to know about the numbers / Karen Berman, Joe Knight, with John Case. Boston: Harvard Business School Press.
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