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Understanding a product or service takes you only so far in the business world. Having a strong sense of financial literacy is what truly gives business leaders a leg up in ensuring their business runs well for the long haul. Here are a few financial matters business leaders can study to allow for faster, more educated decision-making.

Understanding Profit vs. Cash Flow

Companies can make money but still struggle to pay their bills. This seemingly paradoxical predicament keeps many business leaders up at night, but wrapping their heads around the difference between profit and cash flow can help.

It’s all a matter of timing. While you might turn a profit on a product or service, if your payments to suppliers are due before your customer is able to pay their invoice, you won’t have enough cash to cover your expenses.

Applying for a line of credit from a bank could help you avoid falling behind on payments. Alternatively, you could try establishing a more flexible payment schedule with your suppliers and customers.

Keeping a closer eye on payment deadlines and understanding the way they can conflict with income will better equip you for the future. Plus, being more transparent about your financial status will strengthen your relationship with suppliers.

Acknowledging the Cost of Capital

Don’t fight the Federal Reserve here. In the current economic environment of generally higher interest rates, the government advises individuals and businesses to save more cash and be more cautious about making capital investments and taking out large loans.

Before diving into a potentially expensive venture for the new year, make sure the ends justify the means. This is literally the definition of “the cost of capital” — the return on investment needed to rationalize a capital budgeting project.

Let’s say you’re introducing new technology into your daily operations. Are you in a position to deliver the proper training needed to ensure that this technology will run smoothly and increase the efficiency of your service offerings? In terms of overall operating expenses, is there equipment you could buy used rather than new?

Knowing the Long-Term Benefits of Diversity

While there’s an inherent appeal in working with just a few suppliers and customers you know and trust, there’s also an inherent risk in putting all of your eggs in one basket … because you never know how the marketplace will change. Take the economic impact of the COVID pandemic, for example.

Diversifying suppliers can help mitigate the damage of supply chain disruptions like those amid the pandemic. In regard to customers, diversifying can create relationships that widen your reach. Tapping into different demographics can keep your business afloat during economic downturns and ensure a stable revenue stream.

Staying Up to Date

You can’t operate your business with blinders on. While it’s easy to get lost in the daily grind, it’s hard to navigate the marketplace if you don’t have your finger on the pulse of local and national economic conditions. A large part of running a business is adapting to those conditions.

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