Karen Berman - Financial intelligence: a managers guide to knowing what the numbers really mean

Copyright 2006 Business Literacy Institute, Inc.

All rights reserved

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form,or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher.Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.

First eBook Edition: January 2006

ISBN: 978-1-4221-4814-3

Karen dedicates this book to her husband,

Young Riddle, whose love and support are

immeasurable, and to their daughter,

Marie, who reminds us daily

of the joy in the world.

Joe dedicates this book to his wife,

Donielle, and to the seven JsJacob,

Jordon, Jewel, James, Jessica, Jonah,

and Joseph Christian (JC).

We have worked with thousands of employees, managers, and leaders in American companies, teaching about them about the financialside of business. Our philosophy is that everyone in a company does better when they understand how financial success is measuredand how they have an impact on the companys performance. Our term for that understanding is financial intelligence. Greater financial intelligence, weve learned, helps people feel more involved and committed. They understand better whatthey are a part of, what the organization is trying to achieve, and how they affect results. Trust increases, turnover decreases,and financial results improve.

We came to this philosophy by different routes. Karen took the academic path. Her PhD dissertation focused on the questionof whether information sharing and financial understanding on the part of employees and managers positively affects a companysfinancial performance. (It does.) Karen went on to become a financial trainer and started an organization, the Business LiteracyInstitute, devoted to helping others learn about finance. Joe earned an MBA in finance, but most of his experience with financialtraining in organizations has been on the practical side. After stints at Ford Motor Company and several small companies he joined a start-up business, Set-point Systems and Set-point Inc., which manufactures roller coastersand factory-automation equipment. As chief financial officer (CFO) of Set-point, he learned firsthand the importance of trainingengineers and other employees in how the business worked. In 2003 Joe joined Karen as co-owner of the Business Literacy Instituteand since then has worked with dozens of companies as a financial trainer.

What do we mean by financial intelligence? It isnt some innate ability that you either have or dont have. Granted, somepeople are better at numbers than others, and a few legendary folks seem to have an intuitive grasp of finance that eludesthe rest of us. But thats not what were talking about here. For most businesspeopleourselves includedfinancial intelligenceis no more than a set of skills that must be, and can be, learned. People who work in finance learn these skills early on,and for the rest of their careers are able to talk with one another in a specialized language that can sound like Greek tothe uninitiated. Most senior executives (not all) either come out of finance or pick up the skills during their rise to thetop, just because its tough to run a business unless you know what the financial folks are saying. Managers who dont workin finance, however, too often have been out of luck. They never picked up the skills, and so in some ways theyve been relegatedto the sidelines.

Fundamentally, financial intelligence boils down to four distinct skill sets, and when you finish the book, you should becompetent in all of them. They are:

• Understanding the foundation. Managers who are financially intelligent understand the basics of financial measurement. They can read an income statement,a balance sheet, and a cash flow statement. They know the difference between profit and cash. They understand why the balancesheet balances. The numbers neither scare nor mystify them.
• Understanding the art. Finance and accounting are an art as well as a science. The two disciplines must try to quantify what cant always be quantified, and so must rely on rules, estimates, and assumptions. Financially intelligent managers are able toidentify where the artful aspects of finance have been applied to the numbers, and they know how applying them differentlymight lead to different conclusions. They thus are prepared, when appropriate, to question and challenge the numbers.
• Understanding analysis. Once you have the foundation and an appreciation of the art of finance, you can use the information to analyze the numbersin greater depth. Financially intelligent managers dont shrink from ratios, return on investment (ROI) analysis, and thelike. They use these analyses to inform their decisions, and they make better decisions for doing so.
• Understanding the big picture. Finally, although we teach finance, and although we think that everyone should understand the numbers side of business, weare equally firm in our belief that numbers cant and dont tell the whole story. A businesss financial results must alwaysbe understood in contextthat is, within the framework of the big picture. Factors such as the economy, the competitive environment,regulations, changing customer needs and expectations, and new technologies all affect how numbers are interpreted and whatdecisions should be made.

But financial intelligence doesnt stop with book learning. Like most disciplines and skill sets, it must not only be learned,it must also be practiced and applied. On the practical side, we hope and expect the book will prepare you to take actionssuch as the following:

• Speak the language. Finance is the language of business. Whether you like it or not, the one thing every organization has in common is numbersand how those numbers are tabulated, analyzed, and reported. You need to use the language to be taken seriously and to communicate effectively. As with any new language, you cant expect to speak itfluently at first. Never mind jump in and try something. Youll gain confidence as you go.
• Ask questions. We want you to look at financial reports and analysis with a questioning eye. Its not that we think anything is necessarilywrong with the numbers you see. We merely believe it is tremendously important to understand the what, why, and how of thenumbers you are using to make decisions. Since every company is different, sometimes the only way to figure out all thoseparameters is to ask questions.
• Use the information. After reading this book, you should know a lot. So use it! Use it to improve cash flow. Use it to analyze the next big project.Use it to assess your companys results. Your job will be more fun, and your impact on the companys performance will be greater.From our vantage point, we love to see employees, managers, and leaders who can see the link between financial results andtheir job. Suddenly they seem to know both what they are doing and why they are doing it.