The Financially Intelligent Organization: Knowing the Numbers Is a Part of Everyone’s Job
Jan 24, 2019
By Karen Berman and Joe Knight
We’ve done away with silos, created cross-functional teams, learned to collaborate and gotten to know our internal customers. But something is still missing. It takes something more to create an organization in which everyone feels involved and committed, where they understand what they are a part of, what the organization is trying to achieve and how they affect the results. It takes a focus on what all businesses have in common, but many employees, managers and leaders don’t know much about—the numbers.
The numbers have gotten a bad rap. Rarely a day goes by when there isn’t a newspaper headline about a company that cooked the books, or a trial of an executive who allegedly deceived employees and shareholders. But we have a different story to tell, one that illustrates that understanding the financial side of business is a critical element in success. The story is about creating financial intelligence.
Financial intelligence is a set of skills that can, and should be, learned by every manager.
- Understanding the foundation. This is the basics of financial measurement, including the income statement, balance sheet and cash flow statement. It is understanding, and being able to explain, the difference between profit and cash. The numbers don’t intimidate a manager who understands the foundation.
- Understanding the art. Yes, finance is an art as well as a science. The discipline must quantify things that can’t always be quantified, so it has to rely on rules, estimates and assumptions. A financially intelligent manager understands where the art has been applied and what that means for the outcomes.
- Understanding analysis. Once a manager has the first two skill sets, he or she can use the information to analyze the numbers in greater depth. Financially intelligent managers can use tools such as ratio analysis and ROI to inform their decisions.
- Understanding the big picture. A financially intelligent manager knows that the numbers can’t and don’t tell the whole story. He knows that the economy, the competitive environment, customer needs and other variables all must be considered.
Providing education about the numbers is good business practice. After all, businesses are judged, ultimately, by the numbers. (Yes, everything else is important too, but without profit and cash at the end of the day, there won’t be a business at all.) So if people inside the company don’t understand the numbers, they can’t work to improve them. In a financially intelligent organization, trust increases, turnover decreases and financial results improve.
Many organizations already infuse financial intelligence into some part of how they manage:
- Some integrate programs into their leadership development process, knowing that their future leaders must have a solid understanding of financial concepts.
- Others are building a culture of “psychic ownership” in which everyone feels and acts like a partner in the business.
- And some focus on particular areas of the company, such as ensuring the sales force understands the financial side of prospects’ and customers’ businesses, so that they can better meet their needs.
In all cases, leaders and managers know that to create a truly high performance company, education about the numbers, and ongoing discussions about results, must be part of what they do. Just like in a game, how can the players know their next move if they don’t know the score?
Young Manufacturing International, Inc. (YMI) is a real company, focused on its people and its long term health, a powerful combination to set the stage for creating a financially intelligent organization.
YMI was successful. With almost a billion dollars in sales, 1,500 employees around the globe and acquisitions that built up the business, the company was growing by leaps and bounds. On the outside, things appeared exciting and successful—and they were.
On the inside, however, things weren’t running smoothly. Integrating new employees into their strong culture was proving difficult. Productivity was suffering with concerns of job security as positions were being eliminated. Sales were declining due to the confusion that customers were feeling about the acquisitions and stability of the future. There was a growing disconnect between the strategy and the measures that management was being held accountable for reaching. The CEO of YMI decided something big had to be done to put the company back on track. He knew every employee in his organization was the pathway to creating a truly successful organization. Yet he also knew that to thrive long term, there had to be a razorlike focus on their strategy and key metrics. The plan—go “back to the basics”—openly communicated the company’s current status, its strategic focus and goals and its key metrics. They had to make no assumptions about what people knew about the financial side of the business. They decided to create an executive level, book-camp intensive, business finance course.
Commitment must be communicated and demonstrated for all companywide initiatives. But it is especially important when implementing a financial intelligence initiative, because it involves a change in expectations, and sometimes in roles.
The CEO of YMI charged his key senior managers with the creation of the course, but he was involved in the development and in the rollout. He was not going to hand this off to someone else as another training program to implement. This was part of a cultural revolution, one in which some would thrive and others would not.
First the program was rolled out to the top managers of the organization, then to all levels of management and high potential employees. The goals were to:
- Reinforce their culture
- Tie it to the strategic initiatives
- Ensure everyone had a strong foundation in the financial concepts that were key to the organization
- Break it down to the measures for which they would be held accountable
The change in expectations created by a financial intelligence initiative can be difficult for some people. Being asked to be both an expert in their chosen field (such as an engineer, an artist or a plant operator) and a businessperson is either exciting or daunting. Some jump at the chance to learn a new skill set and become more engaged. Others have trouble making the shift. Both groups need attention. Those who are engaged will feel fulfilled in the new role and need to be supported. Those who are hesitant need the time to get a feel for the new way of doing things. Some, it should be noted, may never get comfortable.
At the same time, the finance and accounting managers’ roles shift. They become less of the protectors and holders of financial information, and more of the sharers and educators. They become partners with the rest of the organization, a new role that can be a tough transition for some.
A common misconception is that people know more than they actually do about finance. Not surprisingly people are not open about their lack of knowledge in this area. Who is going to raise their hand in a meeting and say, “Wait a minute, I don’t really understand what this number means,” especially when he or she has been sitting in that same meeting month after month?
YMI’s course has become an integral part of the organization. Its components include:
- An energetic discussion of the company’s philosophy and strategic principles
- Instruction on a variety of topics, including financial statements, ratio analysis, return on investment, working capital management and more
- Exercises, discussions and calculations to engage the participants and “force” them to get into the numbers
- A case study, brought to life through business scenarios in which teams work through calculated strategies and decisions
Choosing the right trainer for this endeavor is also important. It is rarely the company’s financial expert. Rather look for someone who has a blend of training/facilitation skills, financial expertise, operational understanding and is a good storyteller.
Open and honest communication is a hallmark of great companies. But when it’s tough when it comes to financial results. There are concerns about confidential information or that data might get into the hands of competitors. There is a fear that employees will misinterpret the numbers.
Think about this, though. In public companies, most investors know more about a company they’ve invested in than the employees working in that company. Investors study the annual report, maybe listen to earnings calls and check in on quarterly results. This is not usually the case for those inside the company.
Discussing company (or division or department) results on a regular basis creates an understanding about where the company is financially. That knowledge can translate into a focus on decisions and actions that help the company succeed. Sharing numbers does more than create a focus on the financial side of the business. It also builds trust and a feeling of community.
The financial intelligence factor for YMI has gone through the roof. Participants have gone back to their business segments reenergized and refocused. They understand the measure of success and how to drive them to reach their goals. Meetings are much more effective, especially their quarterly business meetings in which segment management presents their numbers and defends their actions to the senior team. Prior to the financial training, these meetings were frustrating for all—senior leaders felt that segment managers didn’t “get it;” segment managers felt “beat up.” Now discussions include healthy debate and well-defended action plans. Everyone is speaking the same language. They are feeling motivated and energized. Increased revenues, lowered expenses and improved employee productivity have ensured that the company is well positioned to continue its growth strategy.
Deciding how to keep financial intelligence going depends on the original needs of the organization. Some companies schedule quarterly classes, so that it just becomes part of what they do. Others have a program targeted at new employees. Others continue to develop new classes to provide an increasingly higher level of financial intelligence for certain target groups.
After the first year of courses had been rolled out at YMI, the senior managers realized they needed to educate the rest of the workforce to have a truly financially intelligent organization. A one-day version of the executive course was created and an intensive train-the-trainer program was developed for internal facilitators to teach the course to all nonmanagement employees. Facilitators are paired up into teams of two—a respected finance person and a business professional. Ultimately, YMI created a top-to-bottom, companywide financial intelligence education movement.
Financial intelligence doesn’t end with acquiring the skill set. It must be practiced and applied, speaking the language, asking questions and using the knowledge to make better decisions. A financially intelligent manager becomes an active participant in the success of the organization.
About the Author(s)
Karen Berman is coauthor of the book Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean (Harvard Business School Press, January 2006) and co-owner of the Business Literacy Institute, a consulting and training firm dedicated to ensuring that employees, managers and leaders understand how financial success is measured and how they make an impact. She can be reached at [email protected] or (800) 270-2537. For more information, visit www.business-literacy.com
Joe Knight is coauthor of the book Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean (Harvard Business School Press, January 2006). He is also a co-owner of the Business Literacy Institute, a consulting and training firm dedicated to ensuring that employees, managers and leaders understand how financial success is measured and how they make an impact. With co-owner Karen Berman, Knight can be reached at [email protected] or (800) 270-2537. For more information, visit www.business-literacy.com