Financial Literacy Matters
Senior executives routinely share and discuss financial data with marketing directors, operations chiefs, and other direct reports. But how much do those managers really understand about finance and the numbers? A recent investigation into this question concluded most managers understand not enough to be useful.
Asked to take a basic financial-literacy exam—a test that any CEO or junior finance person should easily ace—a representative sample of U.S. managers from C-level executives to supervisors scored an average of only 38%. A majority were unable to distinguish profit from cash. Many didn’t know the difference between an income statement and a balance sheet. About 70% couldn’t pick the correct definition of “free cash flow,” a significant metric for investors and analysts.
Have your people take our financial literacy diagnostic quiz to assess the financial acumen across your organization.
Lack of financial literacy matters and impacts an organizations ability to optimally perform. Those who can’t speak the language of business can’t contribute much to a discussion of performance and are unlikely to advance in the hierarchy or reach their full potential. They may be caught off guard by financial shenanigans, as many employees at Enron were.
The CFO of a small manufacturing company often asks candidates for engineering positions whether they would like to review the past two years of the company’s financials. None yet have taken him up on the offer—knowing, perhaps, that they could make neither head nor tail of the statements.
Financial illiteracy in the managerial ranks can be a crippling weakness for the organization, as well. Imagine a business that is attempting to increase operating cash flow. Even experienced executives, accustomed to managing a P&L, may be unaware of the many balance-sheet levers they can pull to affect cash—decreasing inventory, for example, or reducing days sales outstanding.
If you don’t understand what goes into a number, you can hardly know how to improve it.
People don’t tell their bosses that they don’t speak finance. It’s the usual human reluctance to admit ignorance. In a survey managers were asked what happens in meetings when people don’t understand financial data. The majority chose answers reflecting that reluctance, such as “Most people don’t ask because they don’t want to appear uninformed in front of their boss or peers.”
Some of the topics covered:
- The basics of financial measurement: reading income statements, balance sheets, cash flow statements,
- The art of finance: separating hard data from assumptions and estimates, where the numbers come from
- The mechanics of analysis: calculating ratios, return on investment, and working capital
- Cash and profit: knowing how these terms differ,
- Financial literacy and transparency: recognizing how they can boost performance
- Effectiveness and efficiency: doing the right things and doing things right