In my request on Twitter for blog post topics I received a few and I am blogging about them as quickly as I can. One topic was ‘Financial Intelligence’. This could have many meanings so I’ll attempt to explore these.
Businesses do seek to gain financial intelligence; about the market, the economy, their competitors and the business environment generally.
Some information is readily available some not.
Information about demand trends in the market in which they operate. They will look for forecasts regarding demand (and prices) for product they supply – and forecasts regarding supply (and prices) of the inputs they use.
It is also important to obtain the same information relating to their customers as they will be affected by market trends impacting on their customers.
Forecast regarding interest rates, exchange rates, and GDP growth will also form part of the bigger picture that needs to be considered. For example, an increase in interest rates will lead to a decline in the demand for credit and as a result a decline in motor vehicle sales. Or any other products that are largely bought using credit. The outlook in foreign economies would also need to be examined. The decline in motor vehicle sales abroad had a major impact on the SA platinum mining industry.
Listed companies will closely examine the annual reports of competitors to gain information about their market share – and also to benchmark themselves in relation to these competitors. This would include things such as sales per employee, average remuneration per employee and a comparison of profit margins. They would also compare the returns to investors made by their competitors. And clues as to how the directors of competitors feel about their own company’s by looking at the sale and purchase of shares by these directors in their own companies.
The Business Environment
A number of factors in addition to those described above also need to be considered:
- Upcoming legislation – labour, health, environmental and so on.
- Changes to existing legislation – in the areas mentioned above.
- Political risk – Political rhetoric can have an impact on the business environment generally. So too can major unrest by labour – and service delivery process.
Information regarding all of the above is necessary in order for business to make short, medium and long range plans. Not only for medium term budgeting purposes but also for longer term capital investment projects.
I would define ‘financial intelligence’ as financial literacy. Individuals require this in their private lives and in their capacity as business employees at all levels.
The need for financial literacy:
What makes business tick?
Managers are often so engrossed in the running of their departments that they lose sight of the big picture – and how their decisions affect the big picture. Talk of costs, profits, budgets, break-evens, working capital, capex and financial statements can be confusing, yet a familiarity with these will provide an understanding of the consequences of day-to-day business decisions that are made.
Non-financial Managers often feel frustrated because they do not understand the language of business. Many Managers, who do not have a financial background, at one time or another experience difficulty in getting to grips with the financial aspects of a business problem, or, in communicating with financial people like accountants. In addition it is difficult for managers to manage costs if they do not understand exactly what costs are, how they behave and how they have been allocated.
One of the primary reasons for this is the jargon used by the financial people involved. The use of jargon in any situation is of course unnecessary, but is nevertheless a challenge which all managers have to overcome – and this workshop will help them.
An understanding of the financial consequences of any Managers decision is vital. So is sufficient knowledge of the language of business to allow for communication with financial people on an equal footing.
To achieve financial literacy managers need an understanding of the following:
To provide an understanding of these areas:
- how profits are made - the relationship between margins, volumes and expenses
- the effects of price changes on profit
- the difference between profits and cash
- how to calculate break-evens and other business calculations
- the budgetary process
- budgetary control
- how you impact on the business through poor budgetary control
- how to motivate requests for capital expenditure
- ·how to interpret budget variances
- the profit forecast
- the cash flow forecast and the importance of liquidity
- the management of working capital
- accounting principles and how accounting works
- how accountants calculate profits
- financial statements (Income Statements & Balance Sheets)
- · how to interpret financial information
- · the key indicators that enable one to check the ‘health’ of a business
In the words of Warren Buffet:
“Accounting is the language of business”
“There are many ways to describe what is going on with a business, but whatever is said, it always comes back to the language of accounting. When Warren was asked by the daughter of one of his business associates what courses she should study in college, he replied, “Accounting – it is the language of business.” To read a company’s financial statements you need to know how to read the numbers. To do that you need to learn accounting. If you can’t read the scorecard, you can’t keep the score, which means you can’t tell the winners from the losers.” Source: The Tao of Warren Buffet
Which brings me to senior managers and even directors. During the course of my work over the past 40 years I have found that many people in senior positions are not financially literate. Sure, they know the buzzwords and jargon and talk about ‘sweating the assets’ etc. but when I do personal coaching, or conduct workshops, in this area I often quickly realise that it is best to assume no prior knowledge and start with the basics.