If you’re not a numbers
person, finance is daunting. But having a grasp of terms like EBITDA and net
present value are important no matter where you sit on the org chart. How can
you boost your financial acumen? How do you decide which concepts are most important
to understand to your work and your understanding of the business? And who’s in
the best position to offer advice?
What the Experts Say
Even if you don’t need to know a lot about finance to do your day-to-day
job, the more conversant you are on the subject, the better off you’ll be,
according to Richard Ruback, a professor at Harvard Business School and the
coauthor of the HBR Guide to Buying a Small Business. “If
you can speak the language of money, you will be more successful,” he says.
After all, if you’re trying to sell a product or strategy, you need to be able
to demonstrate that it is both practical and high margin. “The decision-makers
will want to see a simple model that shows revenue, costs, overhead, and cash
flow,” he says. “They need to see why it’s a good idea.” Joe Knight, a partner
and senior consultant at the Business Literacy Institute and the
coauthor of Financial Intelligence, says that an
absence of financial savvy is “career-limiting.” If you’re unable to contribute
to a discussion on the company’s performance, you’re unlikely to advance. “You
are not going to be involved in running projects unless you understand the
financials,” he says. Here are some strategies to improve your financial
intelligence.
Overcome your fears
Stop avoiding finance because you’re afraid of numbers. It’s not rocket
science, says Ruback. Think of it this way, “Finance is the way businesses keep
score. It’s like counting balls and strikes in baseball,” but instead you’re
“measuring progress through financial performance,” he says. “It’s not that
complicated.” Besides, the math is easier than you might think, says Knight.
“Finance and accounting are very simple. It’s mostly addition and subtraction
and occasionally some multiplication and division,” he says. “There’s no
magic.”
Learn the lingo
There may not be any magic to finance, but there is a fair amount of
jargon. Fortunately, there are many ways to learn the terminology, says Knight.
You “just need to take initiative,” he says. If your company
offers internal finance training, take advantage of it. If it doesn’t, consider
enrolling in an online or community college class. Of course, there are also
myriad books and reference guides on the topic. The most important concepts to
grasp are “how to measure profitability, EBITDA, operating income, revenue, and
operating expenses,” he says. A finance textbook or reference guide is a good
investment; but “Google works too,” he says.
Tackle the balance sheet
Next, says Knight, you need to immerse yourself in your organization’s
income statements. “Take an interest in the balance sheet and then do the due
diligence to understand it,” he says. The best way to learn, says Ruback, is to
“reproduce the numbers” either electronically or on a sheet of paper and then
“group them into categories so you can start to see how much your company
spends and where it makes money,” he says. Convert the numbers to percentages
so you more easily visualize the breakdown of revenue and expenditures. “You
want to see the big picture.”
Focus on key metrics
Boosting your financial expertise requires figuring out the metrics by
which your company measures success. Your goal is to develop a deep
understanding of the precise “link between profit and loss” and how that
affects your organization’s performance over time, says Knight. That metric is
often expressed in the form of a ratio. “There are four ratios common in every
company: profitability, leverage, liquidity, and operational efficiency,” he
says. And every organization has “two or three ratios within” those groups that
are considered its primary measures of performance, in addition to
“industry-specific ratios.” Paying closer attention to your company’s balance
sheet and “listening to your company’s quarterly earnings calls” is helpful in
getting a handle on these metrics. “They’re not hard to calculate. It just
takes effort,” he says.
Play with numbers
Once you have a solid understanding of the balance sheet and what drives
your company’s growth, try “experimenting and playing with the numbers” by
going through a “series of ‘what if?’ scenarios,” says Ruback. For instance,
What if prices were lower? What if revenue was higher? What if costs go down or
up? “You’re not managing specific business decisions, you’re trying to
understand and internalize how the models work” and the assumptions they make.
That way, when you do need to “tabulate the consequence of a particular
decision,” such as, whether or not to launch a new product or shut down a
factory, you have the tools to do so. “People think budgets are static. But in
most instances, you run the models to figure out what’s important and how much
room there is for error.”
Find a financial mentor
Connecting with a “senior financial or operations manager” who can “teach
you,” and “answer your questions one-on-one” is another way to get better at
finance, says Knight. “It’s a very natural way to learn,” he adds. Ruback
agrees. “Mentors are always helpful for someone who is not good with numbers,”
he says. This person can both help explain concepts and serve as a sounding
board for any financial decisions you need to make. Ruback suggests asking your
colleague “to try to replicate” your projections and models when needed. “It
sharpens your focus,” he says. “You find that Jane made certain assumptions,
while you made others. One is not right and the other is not wrong, but [the
differences] help you figure out what’s reasonable.”
Make it personal
Still lacking motivation? Make improving your financial skills “a survival issue,” says Knight. “Every time
you are paid, your organization makes less profit. So you need to think about
what you can do to help the company remain profitable or be more so.” The goal
is to develop an understanding of how your day-to-day actions help your
employer to “drive revenue or mitigate costs,” he says. “Think of yourself as a
miniature profit and loss statement: How do you add value?” This can be a
useful exercise, but don’t let it consume you, says Ruback. After all, it’s easier
to determine your impact on the bottom line if you’re in sales, but it’s not as
straightforward if you’re in, say, HR. “Integrate your role with the
contributions of others,” he says, “and focus on the problems you can control,
not the ones you can’t.”
Principles to Remember
Do:
- Enroll in an online or
community college class to learn about basic financial concepts and terms
- Review your organization’s
quarterly reports to help you understand the specific things it does to be
profitable
- Experiment with the numbers on
your organization’s balance sheet by going through a series of “what if?”
scenarios
Don’t:
- Be intimidated — business
math is relatively straightforward
- Go it alone. Identify a
trustworthy operations or financial manager who can help answer your questions
and serve as a sounding board.
- Overlook the impact of
financial skills on your career. If you want to advance, you need financial
acumen.
Case Study #1: Partner with
a colleague in finance and experiment with numbers
Larry Dunivan, the chief revenue officer at Ceridian, firmly believes, “All
leaders should be able to talk about the numbers in a broad and sophisticated
way.”
But Larry admits he wasn’t
always able to do that. Earlier in his career, he worked as a product manager
at a software company. As an MBA student at Northwestern’s Kellogg School of
Management, he had taken basic finance courses and his skills were a good fit
for the job. “I managed costs and supported the general business activities
associated with the [products],” he recalls.
But, when he got promoted to
work in a mergers and acquisitions role at the company, he felt in over his
head. “Suddenly I needed to know things like EBITDA and how enterprise value
was determined,” he says. “It was trial by fire, and I remember thinking, ‘How
can I not look like a fool in this meeting?’”
He needed help. Fortunately,
Larry had a good relationship with a peer — “Rick” — in the finance department.
Rick’s job was to build the financial models that would inform strategic
decisions about potential M&A activity. Rick was always willing to detail
how the models worked and answer questions. “He was very patient and
knowledgeable,” Larry recalls.
He was soon comfortable enough
to start collaborating with Rick. “I’d say to him, ‘Show me the variables that
have the most sensitivity,’ and then I would test different assumptions,” he
says. “I still didn’t know how to do the underlying computation to create the
model, but I had a solid understanding of the assumptions that went into it.
Larry says that Rick’s help
and support was invaluable in improving his financial acumen. “A great
partnership with a finance colleague will take you a long way,” he says.
Case Study #2: Learn the
metrics your company uses to measure success
James Pieper, the chief accounting officer at TransUnion, the consumer
credit reporting agency, says it’s “critical” for employees to have a “basic
understanding of finance so they know how their company is doing financially.
“The great thing about accounting
and finance is that it’s universal, so once you have the foundation you can go
from there,” he says.
At the same time, James is
well aware that each company monitors performance in its own way. James spent
most of his career at publicly traded companies. But when he first arrived at
Chicago-based TransUnion in 2014, a private equity group owned it. “So I had to
learn which financial metrics mattered, why they were important, and how
TransUnion measured success,” he recalls.
He did a lot of the initial
learning and number crunching on his own. “Luckily in my position I have access
to every number, so I rolled up my sleeves with an Excel spreadsheet and tried
to re-create the statement,” he explains. “I spent time validating the numbers
to make sure they made sense.”
He also sought guidance from a
“finance buddy,” who at the time was a peer in the accounting department. “He’d
been at the company for a while and he helped me understand the details of the
calculations,” he says.
In 2015, TransUnion went
public, and James had to help the company manage this financial transition. To
boost his skills and knowledge, he looked carefully at the balance sheets of
the company’s “25 closest peers to understand how they structure their earnings
releases and what they put forth as their main financial metrics.”
James often leads in-house
financial training sessions for his company. He says it encourages colleagues
to “understand where they fit in the big picture” of TransUnion’s finances. “I
don’t drive revenue — I am an expense,” he says. “As part of the cost basis, I
try to make my organization run as efficiently as possible.”
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