Aug 31, 2020
If you want to be recognized as an employee who positively contributes to your organization, one of the things you need to understand about your company is the basic financial metrics that drive it. But, that is only one reason to familiarize yourself with the finances.
By understanding the financial metrics that drive your company, you will have better insight into the reason decisions get made the way they do and potentially even be better able to look into the future and anticipate change that may be coming.
To some extent a company’s culture is driven by the finances that underly the business. For example, does your company make its revenue by selling something that is relatively low priced to many, many people? Or, does your company sell something relatively high priced and rely on only a few sales per year?
In the first case, you have something like Walmart. Millions of small transactions per year to millions of different customers each year. Compare that to something like an architecture firm that specializes in building airports. High price tag, and I imagine only 1 or 2 customers per year even come available.
All of the underlying decisions, strategies, and processes for these two organizations stem from how they make their revenue. So, if you want to understand your company better, you need to understand where the revenue comes from.
This applies to the cost side of your business as well. What makes up the cost structure of your business? Do you have costs associated with raw materials? How volatile are the costs of those materials? Or, are the majority of the costs related to labor? For example, software companies and professional services organizations have very little costs outside of the people who work there. If you work for an accounting firm and revenue decreases by 25%, the only real way to get savings to offset the lost of revenue is by letting people go.
The last thing I want cover in this episode is margin. Margin is defined as revenue minus costs. You can think of it as profit.
Understanding the margin that your company achieves will also help you better understand the drivers of your business. There isn’t 1 answer about what a good margin is. For example, grocery stores operate on a 1-2% margin, and that is considered good. Professional Services organizations operate on a 30% (ish) percent margin.
By understanding the level of margin, you better understand the size of the tightrope your leadership team is walking when they make financial decisions.
Investigate your company’s financials. Get familiar with the drivers of your revenue and costs. Understand the landscape that makes up the financial health of your company. Understand how it impacts you. Understand how it impacts your leadership team and the decisions they are faced with.
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