“Money is like a sixth sense without which you cannot make a complete use of the other five.” W. Somerset Maugham
If you want to succeed in your career, nothing is more important than a sound knowledge of finance. That's probably the one principle that every business big shot and every business guru would agree on. Everything we do in business has some effect on the “numbers” – whether they're sales, costs, profits, return on investment, gearing or overall solvency. So if you don't have a basic grasp of the financial implications of your actions, it's very difficult to manage effectively and you're most unlikely to make it to the top.
It's true there may have been a time when financial literacy was not quite so essential. In the highly functionalized and hierarchical organizations common in the past, perhaps some successful managers could proceed through their entire careers with only a limited knowledge of finance. But not now: in the flatter organizations of the modern world, where responsibility is typically devolved to business units, managers need a far broader range of expertise and the ability to qualify virtually all their decisions in financial terms.
There's no doubt that the people who do really well in business these days have a sophisticated knowledge of finance. And the reason is clear: as you rise through an organization, so many things relate to the numbers.
To be taken seriously by the FDs, the MBAs and accountancy-trained colleagues, to construct budgets and win the internal battles for resources, you must be able to talk the language of finance. Money and authority inevitably go to the most trusted people in an organization, and they will be the ones who can explain convincingly the impact of their projects on the bottom line.
Take financial responsibility
Becoming finance-savvy, however, is not just about ambition. It's also about taking responsibility for the investment your employer is making in you. In the first few years of your career, it's almost certainly right to focus on your primary task – whether it's selling in huge numbers, designing inspired marketing plans or inventing great new products. But to take responsibility for a team, a department or a business unit, you have to take financial responsibility. You must get used to being chased repeatedly for your numbers – whatever the indicators are by which your boss will measure your performance.
Taking responsibility for financial outcomes applies equally if you plan to go out on your own further down the road. Whether you intend to be 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.
Interpret your company's financial statements
So what exactly do you need to know? First, there are the three main financial statements of company life: the profit and loss account, the balance sheet and the cashflow statement. Most managers are familiar with the first of these and its relatively straightforward formula that profits (for a company, a division, a business unit or even a single product line) equals sales minus direct costs and expenses. Fewer people understand the balance sheet, which indicates the real health of the business: how much it owes and how much it is owed. And fewer still grasp the vital importance of 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 gearing (the extent to which the company relies on other people's money – 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).
Plan the financial strategy
At a more local level, financial literacy demands 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.
It also demands the ability to make a case for new projects through the process of investment appraisal. To get the resources to implement your latest great idea, you must be able to analyze the costs and benefits of the project, its future path of profit and cashflow, and its risks.
Most importantly, you need to understand the time value of money, that because of uncertainty, money expected in the future is worth less than money in the bank today.
Understand the big picture
Finally, aspiring managers must get to grips with the big picture financial issues that are specific to their companies and then understand what that means for the appropriate focus of their business units. These will vary according to what senior managers and shareholders care about and the key drivers of business success in the 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 FD 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?
Back to the classroom
An alternative or additional strategy is to go on a course. It's hard to beat the potential impact on your career development of a week's intensive training in “finance for the boardroom” or “finance for non-financial managers”. The finance components of distance learning or part-time MBAs from one of the top business schools are also worth looking at.
Finally, you can teach yourself via books and the web. There are plenty of useful paperback introductions out there, including The Penguin Guide to Finance by former Financial Times journalist Hugo Dixon and Smart Things to Know About Business Finance by Ken Langdon and Alan Bonham. And online, the choice is vast.
Many of the best guides to finance online come at it from the perspective of investing in the stock market (www.incademy.com, for example). But the principles of company valuation they describe all 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.
In terms of training products aimed directly improving professional management skills, including financial expertise, Capstone Publishing's Express Exec (www.expressexec.com), which launches in November 2001, is a promising example. And Pearson's Financial Minds site (www.financialminds.com) is an excellent starting point for a range of educational material available both online and in print. It takes you from the basics of financial literacy right through to stuff you may need when you've reached the very top.
Romesh Vaitilingam (romesh@compuserve.com) is the author of 'The Financial Times Guide to Using the Financial Pages', 'The Financial Times Guide to Using Economics and Economic Indicators' and 'The Ultimate Investor' (with Dean LeBaron).