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Understanding the role of money

From: Thinking Like a Leader

Video: Understanding the role of money

Many people view money from an emotional perspective, thinking about the things that money can buy, or its ability to provide for their family. In a business context, we want to remove emotion from the discussion and use money as a score to measure how well the business is doing. No matter what position you hold in your company, you can become savvy about money. This doesn't mean becoming an accountant. It's about understanding the basics of money in order to measure your company's success.

Understanding the role of money

Many people view money from an emotional perspective, thinking about the things that money can buy, or its ability to provide for their family. In a business context, we want to remove emotion from the discussion and use money as a score to measure how well the business is doing. No matter what position you hold in your company, you can become savvy about money. This doesn't mean becoming an accountant. It's about understanding the basics of money in order to measure your company's success.

There are three basics to study: profit, cash flow, and budget. Let's start with profit. In its simplest terms, profit means that income is greater than expenses. If the business brings in more money than it spends, the business is profitable. And if expenses are higher than income, it has a loss. There are a couple of ways you can begin helping your company to become more profitable. The first is learning about which products and services your company provides that are the most profitable? Which make the most money per unit sold? Are there some that make little profit or even result in loss? Now consider how profitable you are for the company.

Are you worth more than what you're being paid? If so, how much more? Many people feel that having a position entitles them to a certain level of pay, and that pay scale is what they're worth. The savvy employee recognizes that their value is actually determined by how profitable they are, so they seek to give far beyond what they're being paid. The rule of three is a simple principle I teach my clients, and it says that for every dollar that you invest in your business, you want to get three dollars in return.

If you try to make investments like that, even when some investments fail, you'll almost always end up being profitable. Ask yourself, am I providing a three times return for my company? For every dollar the business spends on you, do three dollars come back in return? It's a helpful measuring stick to help you look for opportunities to increase the value that you provide. The second money basic is cash flow, which measures how much cash the business has available.

It's different from profit, because cash flow represents money on hand. Cash is the easiest and most immediate way to buy something, as opposed to buying on credit. Businesses need to have a good amount of cash on hand in order to succeed. Regardless of your position, your actions affect the company's available cash. Let's imagine that my company sells bicycles. As the person building the bicycle, I want to build them as efficiently and with as little waste as possible.

As the salesperson of the bicycle, I want to sell them as quickly as I can to avoid having bicycles sitting in inventory, and after the bicycles are sold, as the person collecting money, I want to get paid as soon as possible to get cash back into the business. Every position impacts, even in small ways, the company's cash flow. The third money basic that can help you become savvy is the budget, a financial plan that predicts expenses and income.

Few people enjoy budgeting, yet, it's absolutely essential. You can see the consequences all around you for people who do not live within a budget. Those who do not live within their means, spend more than they have available, and then either go without essentials or end up in debt. If your company or department has a budget, it's important to stay within it. In fact, it's better to spend less than what is budgeted. If you overspend, you'll have to borrow money and repay it with interest.

If you've been given a budget, make careful decisions about how you spend that money, so that you stay within budget. And if you haven't been given a budget, you can always create a simple one for yourself. By learning about profit, cash flow, and budget, you'll be prepared to make wise decisions that benefit both the company and your career.

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Thinking Like a Leader

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Dave Crenshaw
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