Why It’s Critical to Have Sound Financial Acumen
by Ann Martel, Adjunct Faculty
January 9, 2019
Warren Buffet once said, “It’s only when the tide goes out that you learn who’s been swimming naked.“ This advice from an American business magnate and investor is a pretty valid reason why you should improve your financial literacy and business acumen. Sound financial literacy doesn’t mean you have to be a junior accountant, but it does mean you can “speak the language.” While you might not ever be fluent in finance-speak, you can develop the acumen to carry on the conversation in the language of business. Finance folks alone shouldn’t dominate the conversation - better decisions and greater alignment occurs when all departments are balanced throughout an organization.
The essentials to maintenance and growth
There are five main factors that successful companies credit with their continued success:
1. Cash flow
2. Profit management
3. Organization growth
4. Balance sheet management
Successful companies find a way to manage the tensions between these drivers to improve their performance and achieve long-term sustainability. There is a natural tension between profitability and growth. That being said, how should you balance short term decisions against longer term strategies?
The importance of financial statements
There are three main financial statements that tell the story of business operations. Each statement tells a different part of the story. For example, a savvy business person knows there’s a difference between cash flow and profit. That is the reason it is important to be familiar with an Income Statement, a Statement of Cash Flows, and a Balance Sheet.
First, there’s a need to understand finance at the ground level. Income Statements are the scoreboard of the business. They present information about what just happened on the field. While they report on past events, they can also be predictors of the future.
There are also many forms of profit and each one telling a different story - gross, operating, net - but if you don’t know how to contribute to profitability, it’s highly unlikely you’ll be able to and your business results will suffer. That’s where the Statement of Cash Flows importance comes into play.
The third financial statement is the Balance Sheet. Managing the balance sheet can be more complicated than understanding the Income Statement, but the basic equation looks at what an organization owns minus what they owe to others. As Buffet’s quote implies, companies can hide behind income statements but in a downturn, the balance sheet will be the indicator of whether an organization can take advantage of an opportunity or survive for another day.
Too often, accounting and finance concepts are considered a black and white science. However, there is truly an art of financial acumen. For example, numbers in any financial statement reflect estimates and assumptions, and the art in preparing financial statements is using limited data and estimates of the future to provide an accurate description of performance. Also, to completely understand the business, leaders need to know which analytical tools will complete the picture. Certain ratios are critical in some industries, and not so critical in others. While ratio analysis can help in decision making, it can also cause analysis paralysis.
While building financial literacy seems straight forward, numbers can’t tell the whole story. Sometimes, due to bias or downright fraud, they can be manipulated to tell a false story! Financially savvy managers make better decisions and contribute more to the business’s health. Understand there is a financial urgency continuum. When there are urgent financial challenges, the focus is normally on cash. When cash is no longer an issue, companies usually focus on the short-term objectives of profit and assets. A long-term perspective on the continuum will focus on growth, leverage, and people. Very often, decisions made for the short-term profit impact are not good for long-term sustainability.
Looking to improve your financial acumen? Ann Martel teaches Finance and Accounting for Non-Financial Professionals. You can also check out our 2019 course calendar for upcoming dates.