Financial Planning. The Art of Income Creation

By Alexander Visotsky

You don't have to be an economist to plan the company's finances. Nevertheless, it is very important to understand the key concepts and principles of financial management. And this, at times, is difficult because of the large number of special terminology.

In the book "Financial Planning"

• Language: English
• Publisher: Business Booster
• Release date: Apr 5, 2024
• ISBN: 9798869307552

Book preview

A WORD TO THE READER

This book comprises a guide on how to manage finances in business, not only encompassing hands-on management but rather providing a foundation for creating an effective, secure management system ensuring that your managers will never have any issues in finance again. There are a great many textbooks in available on finance. However, they are quite hard to understand, and most aren’t designed for use in practical, real live situations.

This book takes a particularly simple, practical approach to financial management for any manager to be able to understand it and then go on to successfully integrate it, even a small company manager. Standing behind this claim are our consultants, who have given guidance to over 500 companies of all types and sizes. From the smallest firms to large corporations with over 1,000 employees – the principles described in this book have been repeatedly implemented with success. By applying these principles, managers have succeeded in achieving a whole new level of organization and magnified their incomes dramatically.

The main concepts outlined in this book with regard to a company’s financial management system have already been described long ago by classic management authors. However, as you may have experienced, it is not that easy to take a theory and put it into practice. In overcoming this difficulty, the practical financial management know-how described in the works of L. Ron Hubbard are particularly valuable. It is this know-how that enabled us to create an effective yet simple system for companies to manage their money which can be employed by a great variety of different businesses.

As you read through this book, mark the particular terms and words you don’t understand. Understanding the definitions of words will provide you a stable foundation upon which to build a greater level of competence. The field of finance contains a multitude of technical terms, and at times it is quite difficult to discern simple and clear definitions. For this reason, this book contains footnotes with explanations of words that may potentially be misunderstood. If you find yourself exhausted from reading and losing interest, what likely happened is you went past a word you didn’t understand. Clear it up. Finance is actually a simple subject. The only reason it appears so complicated is due to the technical terms used in it.

As you read this book, chapter by chapter, you gain more and more of a full, clear picture of the financial activities your company is engaged in. You will find the answers to some of the most complex and frustrating questions associated with financial management.

Business owners will be able to use this book as a means of escaping operational management and beginning to expand, all the while retaining total control. Managers of different levels will find answers to questions on how to allocate funds and ensure that their own departments are functioning the way they should. Financial professionals will attain a complete understanding of how to organize financial activities while achieving the full cooperation of managers, creating a company budget, and making on funds allocation decisions.

I sincerely believe that no manager can do without having a complete understanding of how to manage a company’s finances — without this, success is simply unattainable.

Chapter 1

FINANCIAL MANAGEMENT

Surely you’ve already heard of financial management or managing finances. In all likelihood, someone has probably tried to convince you that it’s complicated before. Truthfully, it’s quite simple, and anyone, from the diligent homemaker to the skilled mechanic, should able to explain the basics of it. If a homemaker can manage the funds to cover all the family’s needs without creating any debt, they can manage finances. How do they do it? They simply plan all their expenses around the current household income. By planning them out, they ensure that payments for all important items are covered. They maintain robust discipline regarding expenses and don’t allow anyone to spend the money allocated for those purposes on other items.

In this chapter, we will take a look at financial management and what exactly its purpose is. Different theories, ideas, and concepts exist on this subject. One theory holds that financial management serves to economically allocate money into savings. Another maintains that money should be primarily used to expand and increase the company’s income as fast as possible. This chapter will escape the bounds of financial management theory, and help you achieve a clear understanding of the subject as a whole so you can use it yourself.

I will begin by talking about my mother and a number of other people. At first, you may think that the following examples have nothing to do with managing finances in business. However, that is incorrect. Those to whom I will draw attention intuitively apply the basics of financial management in their own lives. It was only when I grew up that I realized my mother was a financial management guru. She has never had any debt, nor did she ever buy anything on credit. Moreover, she has always had money set aside for a rainy day, so even when an unexpected expense arose, she didn’t need to take out a loan. And she managed that on a fixed income! She simply knows how to create reserves and gradually accumulate enough funds for larger purchases. She set aside separate amounts for unexpected expenses.

When it comes to money, people could be divided into two categories: those who manage their money thoughtfully and don’t create debt regardless of their income, and those who fall into debt even if they make an above average income. Some people always live within their means while others are constantly getting themselves into trouble with money. This has nothing to do with the size of their income. The people in the first category simple use financial management, while the second group doesn’t employ any kind of system at all. Their finance-related operations are chaotic and the results of their actions are unpredictable.

A few years ago, at the beginning of the Summer, I ran into an old acquaintance at a gas station. He seemed to be quite successful. It was a warm, beautiful day, but the Summer heat was still a ways away. My acquaintance drove an amazing new Porsche Cayenne. I was surprised as I didn’t think he was all that rich. The car’s wheels caught my attention — my friend was oddly still using winter tires. After talking to the guy for a few minutes, I realized he simply didn’t have enough money to buy a set of Summer tires suitable for his car.

That is undeniably amazing: when he was buying the car, this guy didn’t consider the future maintenance expenses it would have. His financial management was horrible, as he couldn’t even enjoy driving this expensive new car he bought. Driving a powerful car on the sun-heated asphalt with winter tires is hardly enjoyable. Winter tires are heavy and loud, and they slide over puddles since the tire tread isn’t designed for that kind of weather. In any sports car, a driver will experience the full consequences of using the wrong tires. His investment in the joy of driving came up short, as he didn’t properly plan his expenses and coordinate them with his income. As a result, instead of enjoying driving a powerful, luxury car, he now has extra problems to deal with. He can’t afford to service the car and the monthly installments are more than he can handle, the basic reason being: he wasn’t familiar with the most basic aspects of financial management.

You could say exactly the same of a business where the managers are forced to manually handle a lack of money and unexpected expenses. Here is what usually happens in a business: at the end of the month, an manager has to look for money to pay the employees’ wages and account for office rent by postponing payment of all of his other bills. Sometimes he has to borrow money to smooth out unexpected problems that arise. On the other hand, if a company has enough money to comprehensively pay for the company’s operations and expansion, and all its contractual partners’ invoices are paid on time, you can confidently say that its finances are being skillfully managed.

Financial management is an effective and efficient method of handling money to help an organization achieve its goals.

If a company is wisely spending its money, avoiding taking on debt that it cannot pay back and expanding at the same time, then its financial management is completely fine. While it does sound simple, there is a catch. This result has to be achieved by an manager personally handling this area. Will his hands-on financial management turn out to be effective?

When founding a company, it’s the owners and managers that deal with the allocation of funds and decide which expenses to approve. In this moment, a particular hands-on financial management model is created, which will then last for many years. As with any habit, it does have certain benefits, seeing as upon a business’ conception, even the smallest mistake may entail disastrous ramifications. A person at the head of the company usually takes complete responsibility for making financial decisions to avoid financial matters getting out of hand. Quite often, such a person is either risking their own money or the money his investors have entrusted to him. During that time, every cent counts and money is the most important resource, so the success and speed of expansion both depend on how well money is managed.

When I founded my first manufacturing company, I knew that to begin manufacturing would require a large investment and a great deal of time. I knew we would have had to invest not only in equipment, materials, and the premises, but also in non-material objects – marketing and employee competence. I wasn’t under any illusion that the money I invested would yield quick returns. We needed time to achieve popularity, a reputation, and train specialists to become competent on the job. Additionally, we had very little money to work with, and by the time we properly equipped manufacturing and hired our first employees, our funds were completely depleted. All further financing came from the income we were earning through our operation. We were sorely lacking in funds and I had to solve financial puzzles practically on a daily basis. Not only did we count every cent – all of the income we were expecting in the near future had already been promised to an investor to repay the debt. Every day I had to juggle the money and obligations I had just to make it to tomorrow. I had unpaid rent invoices, debts to suppliers, and even unpaid wages to employees. I spent almost a year of my life paying all my debts and working to stay above the red line.

At the time, I didn’t comprehend the basics of financial management and, to be honest, had more pressing matters to deal with than studying how to properly manage money. Even if someone were to have walked up and told me, Man, you are spending too much of your valuable time and attention on dealing with financial issues. There’s another way! I would simply not have listened to them. Now, having created a number of successful businesses, I can see very clearly that my incompetence in money management and my manually handling all expenses were simply robbing me of my time and creative energy. If I had had an idea of how to properly organize things, I would have been able to direct my efforts to marketing development, sales, and manufacturing, and the company would have nowhere to go but up.

For most business owners, especially those who own small businesses, financial management starts with hands-on management and remains that way forever. It all starts with the business’ founder, who is full of enthusiasm and is happy to handle these matters. But if the hands-on management phase continues, all these actions will become routine. From the viewpoint of company expansion, these routine activities are dangerous. They don’t allow the owner a chance to escape beyond daily operational management. The ability to correctly prioritize expenses comes from a comprehensive understanding of those expenses and comparing their relative importance. Should we pay the advertising bill or would it better to buy more materials? To answer this question, one must understand the nature of advertising, how it is supposed to work, and how the manufacturing materials will be used. In attempting to understand such matters, an manager is forced to examine every detail. His attention is scattered between thousands of little problems. As a result, he doesn’t have the chance to see the overall state of the company’s operations.

Compare this situation to a hamster wheel, where the poor animal is running as fast as it can but still cannot make it ahead even one bit. And the faster the hamster runs, the faster the wheel turns, and the faster he has to move his feet. As the company expands, the amount of issues an manager has to deal with grows even bigger, and this will go on forever until he collapses in exhaustion. There is only one way off this hamster wheel, and it is not by running faster. You need to take a step to the side. To escape beyond operational management, a company owner first must understand how financial management is done at his company and then he must reorganize the company’s operations to be able to jump off the wheel. To equip you with the tools to do that, this book will first describe the ideal state of affairs in the area of financial management, who should be doing what, how it all should be organized, and then we will explain how to put it into practice.

You may be wondering: Why don’t I simply shift all of that onto the shoulders of a responsible and honest financial manager? This is a natural question for a proficient manager to ponder. A skilled manager, unlike a newbie, knows that if you’ve encountered a problem, your first thoughts should be not about how to solve it, but who can do it. However, the field of finance is too hot to put in the hands of just anyone. It is obvious that even if you have a competent, reliable specialist, he needs to have exact guidelines for this area, and you need a way to monitor his actions. People say that there are two things in life that can drive people crazy –money and in sex. I can definitely say I agree with the first thing.

When you’ve been working in people management for a few years, you’ve gotten a very good idea of how it can drive people crazy. I will never forget the amount of confusion I experienced when my business partners and I discovered that a small amount of money was missing from the company safe. Money disappeared from the company safe during working hours. The safe wasn’t locked since it was in a room that only partners and a few employees had access to. Before this happened, none of us could even imagine that someone was capable of stealing money. I will never forget how we felt when we discovered that money went missing — a combination of shock and confusion. What would you have done in a situation where only good people that you respected were working for you, but the fact remains that money was missing?! During this odd and stupid situation, I realized for the first time that money requires proper control and organization. The amount that was stolen wasn’t a lot, but it became obvious that we needed security guidelines, otherwise sooner or later we would continue to have major problems.

I established my first business at the age of 23, a year after graduating from college. Since then, I’ve founded a number of companies, and during that time I have seen so many different things! From a partner who was entrusted with the company’s finances blowing company money at a casino to a company that was stupidly purchasing items for inflated prices. I can say with complete confidence that a lack of sound financial management opens the door to crazy dealings with money.

From the business management side, you could say that a good financial management system must be designed to:

1. Ensure the sane handling of finances, which helps increase product manufacturing, income, company profits, and help fulfill its strategic plans.

2. Render financial abuse impossible.

3. Allow one to delegate financial management to company managers so the executive can work on growing the company.

4. Provide full control over the company’s finances.

In the following chapters, we will look at all basic elements of the system I’m proposing, as well as examples of its application. Once you fully understand this material, you will have a clear idea of how financial operations can be organized in your business. Naturally, to be able to apply these ideas in your company, you will need to exert a certain amount of effort, but it’s worth it.

Chapter 2

MONEY AND MANAGER RESPONSIBILITY

Most company managers ask the following question, Who should manage the company’s money and be responsible for ensuring that it’s used effectively? The obvious answer may be that the CEO should be the one responsible, because he is overall in charge of the entire company. But common sense says otherwise. A company has many managers, and their divisions make large contributions to operational results with overall success depending on their coordinated activities. They also need to take part in financial management. To understand this, we first need a clear idea of what money is — what kind of object it is. Some people think that money is the purpose and goal of a business; others say that money is correlated to results, and if the results are good, then there won’t be any money problems.

Essentially, money is the representation of value that aids exchange – this is exactly why money was created. Before we had money, there was a barter system where one product or service was simply exchanged for another. That’s how people got everything they needed. It was a very complicated and inconvenient system, and as mankind progressed from subsistence production to an economics system with specialized manufacturing, it became harder and harder to for the barter system to be used. The system that followed involved the use metals, such as bronze, silver, and gold as means of exchange, which was much more convenient. While people were using these precious metals, inflation couldn’t exist, because the monetary units – coins made out of precious metals – had a tangible value. Eventually, dealing with metal money also became too inconvenient, which led to the creation of paper money and bonds. To ensure people’s trust and enable this new money to be used as means of exchange, the gold standard started being applied. The concept of the gold standard was banks would only issue paper money that was guaranteed to be exchanged any time for gold. For this reason, paper money eventually became the primary means of exchange. Naturally, the idea of using gold is not absolute either. If the amount of gold being mined were to drastically change, that would also influence the value of money.

Ending the gold standard, as economists say, was necessary for economics to develop. The amount of gold was limited while the amount of valuables produced in the world increased. Therefore, the supply of money had to be increased. However, at the same time, it enabled governments to print money at their own discretion. When the amount of money printed becomes greater than the amount of valuables manufactured, we have inflation. And the less confidence people have in the government’s sanity and the stability of the economy in the country, the less valuable that money becomes. The less confident we are that tomorrow the money will buy us something, the more we desire to exchange it for another currency and vice versa. As the country’s economy becomes stronger, and the more sanity the government shows in its money management, the stronger the nation’s currency becomes.

Since the monetary reform of 1897, when paper money received the backing of gold, the economy of the Russian Empire received a large amount of internal and external investments. People’s trust in money has greatly increased and so has its value. But the turn away from the gold standard in 1914 due to the war and the revolution that followed led to the Russian Empire’s paper money completely losing its value.

Therefore, money itself does not bear any value simply because you can buy something with it. From the viewpoint of an organization’s activities, money is the equivalent of different resources that are necessary for operations. By the way, this is why when someone tells me that earning money is the goal of their business, it’s clear to me that this person doesn’t have any idea what money actually is. To say that earning money is a business’ goal is to say that using and accumulating resources is the goal of manufacturing. Suppose that a concrete manufacturing factory’s goal is to accumulate materials in its warehouse, hire as many employees as possible, and purchase new equipment. All of these things are the primary resources. It seems silly, because such a factory may have the goal "To