The importance of astute financial decision-making for leaders
The performance of an organization is irrefutably associated with its financial status. However, the recent economic volatility and extreme competition has made it even more important for leaders at every level within an organization to acquire financial acumen. The ability to interpret numbers and their impact on the performance can provide leaders with the insights they need to plan better and make decisions favorable to the organization with a higher degree of success. Although, it is easier said than done, if implemented properly, it can help catapult leaders and organizations into a higher state of stability even in the most turbulent times. Here are some of the essential components that make the most profound impact on financial decision making for leaders.
Cash flow is the basis of the functioning of any organization. It determines the present health and the future prospects of the company - how many people it can hire, what resources it can employ, and the investments it can make in the future. Leaders at every level must get a firm grasp of this metric from the beginning if they are to make sound decisions.
The difference between cash, receivables, inventory and liabilities like payables and accruals defines a company’s current assets. Managing assets effectively play a critical role in a company’s success. Leaders must keep these assets in mind while making financial decisions in order to enhance the efficiency of the working capital of the organization.
Profitability measures the operational success of the organization and is defined as the net profit from each sale. It taken into account the effort and expense incurred in each sale. A clear understanding of profitability allows leaders to determine the loopholes and devise effective course correction measures as required.
Uncertainties and risks are integral in every business. However, organizations must take steps to ensure that they do not hamper growth at any stage. In order to do that, leaders must identify them, and set up processes to mitigate the cause and effects of these uncertainties and risks at every stage.
Each business unit within the organization needs to manage its tax liabilities in order to maintain profitability. Every new initiative must be weighed against its tax implications and the net-value it generates for the organization. Leaders in global organizations that operate in varying tax environments must account for these implications at every stage in order to optimize the organisation’s tax liabilities and generate higher profits.
Many studies show that a majority of business strategies fail to take off due to a lack of execution capabilities that allow resources to be squandered without check. One of the primary roles assigned to leaders is to give direction to the organization’s business. In order to do so, they must possess the necessary skills to make decisions at every stage of the business cycle. The importance of astute financial decision making is reflected in each of the elements discussed above as they provide the data for leaders to strengthen their innate managerial skills. Although, these elements cover the basics for any business, they provide a sound structure for leaders to ensure that their financial decision making is above par every time and generate the desired value for the business and every stakeholder involved.