A sound knowledge of finance is an essential part of becoming a successful executive. Everything we do in business has some effect on the “numbers” – whether they're sales, costs, profits, return on investment, gearing or overall solvency. Whereas managers in highly functionalized and hierarchical organizations common in the past could proceed through their entire careers with only a limited knowledge of finance, responsibility now typically falls on business units, and managers need a far broader range of expertise and the ability to qualify virtually all their decisions in financial terms.
If you’ve taken on a position of responsibility within your company, it is very difficult to manage effectively and harder still to advance without a basic grasp of the financial implications of your actions. If you don’t have that level of fiscal know-how, you can be sure that someone who does is standing by, waiting for a chance to step into your shoes. So what must you know to ensure your success? There are a few areas of knowledge you must have to lay the groundwork for a productive and profitable career in management.
Take financial responsibility
Financial issues may not be the primary goal of your position. But even if you are tasked with increasing sales, developing marketing plans or devising new products and systems, your responsibility as leader of a team, department or business unit requires knowledge of the numbers that go into achieving your ends. Your employers are making an investment in you, so it’s only fair that they measure your performance in terms of resources spent and results produced.
Whether you are an individual entrepreneur or a rising star within a large corporation, you'll need resources. That means taking responsibility for the money you're being given by the bank, by a venture capitalist or by your employer. And you can only do that by becoming financially literate – not just numerate but also able to understand what the numbers really mean.
Understand financial statements
There are three main financial statements of company life:
- Profit and loss account – how sales measure against direct costs and expenses.
- Balance sheet - how much the business owes and how much it is owed.
- Cashflow - how much money is coming in and out of the business.
From these three statements come the key ratios that can be used to manage the business. These include leverage (the extent to which the company relies on other people's money, or debt), return on investment (profits as a percentage of the capital employed to earn them) and gross and net profit margins (profits before and after deducting expenses as a percentage of sales).
Develop financial strategy
Most leaders require the ability to create a departmental budget – to lay out your plans for the coming year in terms of projected sales, production costs, selling and distribution costs, and expenses. That skill becomes even more important as budgeting principles are applied to new projects. To get the resources to implement your latest great idea, you must be able to appraise the potential of your investment: costs and benefits of the project, future path of profit and cashflow and any associated risks.
Becoming a financial strategist feels perilous because your planning is founded in uncertainty: money expected in the future is worth less than money in the bank today. Your strategy must demonstrate that the value of money spent now will be justified by the eventual result.
Think big picture
You will want to understand how the fortunes of your company or department are affected by the actions of competitors, by news and events affecting your industry and even by changing economic conditions around the world. This can vary according to what senior managers and shareholders care about and the key drivers of business success in your industry. In retail, for example, where profit margins are incredibly thin, the primary goal is to protect those margins through fierce cost control and rapid stock-turn. In contrast, in management consultancy, where expenses are huge but so are margins, business managers tend to be most concerned about increasing sales or “top line” growth.
That's the basic syllabus. But how should you go about improving your knowledge of finance? The ideal way is to do it internally by finding a mentor, someone who understands the company's finances and is willing to help you learn. Make friends with the financial director or business manager for your division. They will appreciate your enthusiastic interest and as powerful players in any company, once they trust you and your burgeoning financial literacy, you will have a great ally. And as your competence with the numbers grows, demand more information from your senior colleagues: how profitable is my division and my product? And more broadly, what do the shareholders want in terms of financial performance?
An alternative or additional strategy is to take a course, expanding your knowledge of the core proficiencies of financial acumen. Distance learning or part-time MBAs from a top business school are also worth considering.
Finally, you can teach yourself via books and the web. Many of the best guides to finance online come at it from the perspective of investing in the stock market, but the principles of company valuation fit neatly together with the principles of business finance that you'll want to understand. If you can appreciate what shareholders are looking for, you'll begin to see how those aims cascade down through an organization to the things you'll increasingly be hoping to manage: budgets, new project appraisal and the overall financial performance of your business unit.