It should be of no surprise to any business professional that understanding the basic concepts of money management and manipulation are essential tools in the building process of success. The link that can be missing between knowledge and implementation, however, is the way these concepts can be used and expanded upon to directly affect a business’ bottom line.
The term “bottom line” itself is a basic financial concept that describes the total profit of a company after all expenses are subtracted from revenue. This can also be assumed to be understood by most leaders in the business world, but what is sometimes forgotten is how the bottom line can be multifaceted. The term coined for this concept by John Elkins is the “Triple Bottom Line,” and is defined by the Universities of Wisconsin as a theory that “expands conventional business success metrics to include an organization’s contributions to social well-being, environmental health, and a just economy.” This simply means that an organization can focus on more than the financial bottom line to understand the health of its company.
Diversification
In the financial world, diversification is a core concept that ensures an entity’s eggs are not all placed within the same proverbial basket. The Raymond A Mason School of Business defines this strategy as “…the process of dividing money between many different types of investment products…together, these assets make up a portfolio. Individuals and organizations diversify their portfolios in different ratios based on their financial goals.” This is another example of a financial theory that is widely understood but could be expanded further to assist with other facets within the business world.
When a company is formed to produce a product for a certain industry or provide a service for a certain population, it is beneficial to consider if it will have the capability to diversify within that market should the initial plan not succeed. Products can be made obsolete, services can no longer be desired, and when this happens, a company who has put its effort into a singular focus can fail. Companies such as Kodak and Blockbuster are prime examples of a lack of diversification within a market; some may also call this failure to innovate. Vendor competition and customer demand are always fluctuating within specific markets, and a business with a diverse capability portfolio will be set to capitalize on these shifts and keep their bottom line sufficiently in the green.
Diversification can be applied to many other facets of business, including supply chain sources, hiring sources, employee benefits, marketing strategies, and overall decision making.
Variance Analysis
Variance analysis is yet another financial concept that is useful to understand as well as expand upon. The Association for Financial Professionals defines variance analysis as “a quantitative method used to assess the difference between planned and actual financial outcomes.” This concept can be applied in the professional world to various topics, including employee development, equipment utilization study, and new product performance analysis.
Angela Grothaus, partner at CLH, CPAs & Consultants, explains how understanding variance analysis application is a crucial skill in the financial world as well: “By analyzing the variance between a client's budgeted and actual monthly expenses, we can identify consistent overspending in discretionary categories like dining and entertainment. By identifying these variances, we can move the conversation from the vague idea of “spending too much” to an actionable strategy.”
Expanding upon financial principles to improve business practices and influence the bottom line is a principle that can be applied to many other areas, including risk and return analysis, compound interest calculation, cash flow analysis, income statement literacy, and more. The key is understanding that financial literacy can be beneficial to the bottom line in more ways than one.
