Mathematics for Business and Personal Finance – Why’s it So Important?

Mathematics for Business and Personal Finance

Not many people like math and even fewer people are actually good at it.

But the importance of mathematics for business, and personal finance, shouldn’t be underestimated.

Why?

Because mathematics helps to give you control over your personal life and is essential to maintaining a profitable business.

We look at the reasons why math is important in more detail and which mathematical concepts can positively impact your personal and professional life.

Reasons why math is important in managing your personal finances

Let’s start by looking at how mathematics can help you in daily life and provide lifetime financial security.

Keeps your brain active – maths has been described as exercise for the brain. It can boost the capacity of the brain and boost its ability to think critically. Using your brain in this way keeps it healthy and in good working condition. Studies have shown that people who use their brains on a regular basis are less likely to develop illnesses such as dementia and Alzheimer’s disease.

Helps you manage your finances more effectively – our understanding of mathematics affects the financial decisions that we make every day. Mathematical concepts help us to budget, spend, save and invest. The basic principle of budgeting is making sure that your monthly expenses do not exceed your monthly income. To know this, basic mathematical concepts such as addition, subtraction, multiplication and division are needed.

Gives you better problem-solving skills – the main purpose of learning math is to solve problems. Math helps us to think analytically and look for solutions to problems. The steps you take to solve simple problems is a strategy that can be applied to other problems in life.

Provides greater career opportunities – every profession uses maths in some form. Learning math can help workers to analyze and solve problems, which are qualities that an employer will value. Math also teaches other important practices such as how to approach tasks methodically, pay attention to detail and think abstractly.

Reasons why math is important to run a successful business

Understanding basic math is key to the survival and success of your business. Addition, subtracting, multiplying, dividing, rounding up, using percentages and fractions will help you in the following essential areas of business.

Calculating production costs – adding together all of the expenses associated with selling a product or providing a service is essential to ensuring that your business can be competitive and profitable.

Determining product pricing – it’s important to price your product correctly to ensure you have enough cash flow in your business to invest and continue growing. It’s equally important not to price your product or service too high or low.

For example, if a product costs $10 to produce and your markup is 35%, subtract 0.35 from 1 (or 100%), which gives you 0.65, which is 65%. To calculate the price of your product, divide 10 by 0.65, equalling $15.38.

Measuring business profits – understanding your net profit will help you decide whether you’re charging enough or selling enough to expand your business. Returns, costs to produce and other operating expenses should be subtracted from your total sales to give you a net profit.

Improves everyday business money management skills – the overall financial health of your business is determined by revenue and predicted expenses for the future. Before taking your business to the next level it’s crucial that you estimate how your finances could change going forward and what impact that would have on your profit margin and expenses.

How learning mathematical concepts can positively impact your business

Basic knowledge of a few math concepts is important if you want your business to thrive.

Gross margin – the gross margin is your net sales minus the cost of goods sold. The purpose of this calculation is to show the amount of profit made before taking away any general and administrative costs.

Profit margin – a profit margin shows you what percentage of sales made have turned into profit. For example, if your business has achieved a 35% profit margin it means that a net income of $0.35 was achieved for each dollar of sales generated.

Operating margin – operating margin measures the percentage of revenue a company keeps as operating profit. This metric indicates to investors how profitable a business is and offers a convenient way to compare competing businesses or different industries.

Compound interestcompound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. In other words, it’s the interest that you pay on interest. Businesses can use the power of compounding to grow profits, reduce cash flow issues and improve business performance.

Simple interest – by multiplying the daily interest rate on a loan by the number of days between payments you can work out the simple interest. Each month’s interest is paid in full so it never accrues. In contrast, compound interest adds some of the monthly interest back onto the loan; so the following months mean you pay new interest on old interest.

Profit and loss – also called a P&L statement that shows the revenue, costs and expenses that a business incurs over a period of time. Ultimately, determining your profit and loss will help you measure a company’s performance and business success.

Median – put simply, the median number is the middle number in a list of numbers. The numbers must be sorted first from lowest to highest value. The median number is often used in business instead of an average to provide a more accurate figure.

Interest rates – an interest rate is expressed as a percentage and determines the amount a lender charges the borrower for funds. It’s important for businesses to be aware of the current interest rate because they can affect the growth of a company. Not only will a high interest rate affect any loan repayments that you have, but it can also have a negative effect on how likely you will be to secure funding.

Markups and markdowns – A markup is the amount of increase in a price. A markdown is the amount of decrease in a price. The purpose of using markups and markdowns in business is to increase revenue and profits. It can also help recover costs from labor and materials that you’ve used in your business. Markups are often used to determine a pricing strategy that beats your competitors and positions you well in the marketplace.

Statistics – businesses need to collect data to make informed decisions that will benefit the performance of the company. For example, if you collect data and statistics regarding employee productivity, the data needs to be analysed to find out how to achieve maximum productivity. Statistics also play a big part in market research and finding out whether there is a demand for a particular product or service before going to market.

Formulas – when it comes to business accounting, formulas are essential in ensuring your books add up. For example, the inventory turnover ratio shows business how many times it has sold and replaced its inventory. This can help a company make better decisions on pricing, manufacturing methods and marketing. Return on assets is another formula that is used to find ways to make the return on assets as high as possible. There are several ways to work this out, however the simplest is to by multiplying net profit margin and asset turnover to give you your return on assets figure.

How learning mathematical concepts can positively impact your personal life

Now let’s look at the reasons why we need to use math in our daily life.

Grocery shopping – you will often be faced with several mathematical concepts at the grocery store, including ‘50% off’ and ‘buy two and get one free’. Our brain needs to use basic math such as addition, subtraction, multiplication and division to work out whether we should buy the product.

Managing our time – most people have numerous tasks that need completing in a day. To help us manage time we use mathematical concepts such as adding, multiplying, subtracting and dividing to complete all of our tasks within a certain amount of time.

Travelling and driving a car – we need addition, subtraction, multiplication and division to help us plan a trip and arrive in time. To do this we calculate time, distance and speed. Simple road speed signs also help us drive safely to the conditions of the road or area that we are driving through.

Interior design – whether you’ve always dreamed of being an interior designer or just want to revamp your home, redecorating involves a lot of math. You will need to know how to calculate your budget effectively and plan the interiors based on the area and volume of each room. Geometry, ratios and basic math such as adding, multiplying, subtracting and dividing are used to reach the complete the project.

Makes you a better cook – math skills are essential in cooking and eating healthily. From adapting recipes that feed three to four people by multiplying the ingredients by 1.333 to dividing a cake into 12 equal portions, you’ll need basic maths skills to get the result you need. Not only will a strong foundation in mathematics help you to manage your money more effectively, but it can also help to shape your financial future.

Keeps you fit and healthy – to make the right food choices we need to calculate how much we should eat based on our height, weight and exercise regime. Maths will also help you calculate how many reps you should do in the gym based on your personal fitness goals.

Using mathematics in your personal and professional life

There are plenty of ways that you can improve your knowledge of basic mathematical concepts. Here are a few to consider.

Online courses – if you prefer to learn in a structured way, online courses are a great way to boost your knowledge around your other commitments. With no pressure of an exam at the end, most adults find this an effective way to learn new skills that you need.

Watch YouTube – there are hundreds of videos online designed to help adults improve their basic math skills. These are presented in a way that is entertaining and helpful.

Study with friends – if you get frustrated with your progress easily, try studying with friends or family members who also want to improve their mathematical skills.

Use an app – making learning fun applies to adults as well as children. There are some great apps out there that make learning math enjoyable. Star Dash Studios and Sumaze! are both popular choices.

Practicing your math by applying your knowledge on a daily basis is the best way to improve your skills.

Want to know more about how to manage your personal and business finances? Head over to our finance blog for informative articles on budgeting, saving money, taxes and more.

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