How To Master Those Basic Financial Terms

There are many creative spirits within the modern corporate world just as there are a large number of natural leaders and motivators. The ability to see things that nobody else can see, to 'think outside the box,' is a highly desirable tool and there is no question that business thrives on these visionary creatives and the incredible new products and methodologies that they bring to the world.

Similarly we will always require strong leaders to co-ordinate and oversee complex projects, deploying the right people to the right tasks and keeping a firm, authoritative ownership of the entire process. Motivation of staff is key to ensuring the successful completion of any given task and the ability to communicate passion and positivity to a group of disparate individuals is a significant skill.

And yet both of these qualities are to some extent luxuries. They are neither tangible nor quantifiable and, were they to exist in a vacuum, would prove of little real use. The spine of any project is the financial accounting; the cold, hard statistics that tell you and your team what can be achieved with a certain amount of resources, on a limited budget and in a strict timeframe.

Finance is not especially sexy and when many young professionals enter the business world their heads are often full of exciting products and branding and dramatic, high level negotiation rather than spreadsheets and cash flow diagrams. But getting the basic financial decisions right is often the most crucial area of a project's success and one in which more project managers and business professionals need to be skilled.

One of the financial fundamentals is profit and loss. Everybody knows, or thinks they know, exactly what profit and loss is and whilst it may be a simple concept to get your head around many professionals do not consider the implications of the profit- loss relationship as closely as they might.

A surprising number of people get flummoxed by the difference between gross profit and net profit and this is potentially disastrous for valuing a business as well as for continued trading. Gross profit is the amount generated from sales minus the costs incurred in order to achieve those sales, such as the purchasing of raw materials.

But there are many other factors to take into consideration before you begin to reach a true indication of what your profits really are. For instance there are overheads such as rents, salaries and depreciation on fixed assets such as vehicles that are used over a period of time for essential business practice. There are the thorny issues of tax and interest. And there is the interest payable on bank loans that have been used to start up the company. Once all of these factors have been deducted from the gross profit you will be left with your net profit (and probably a sadder facial expression) and the most accurate valuation of your business as possible.

It may be basic but ensuring that you are fully aware of the relationships between these financial terms will reap great rewards for your business in the long run.