Financial Awareness Training

Managers at many organizations are operating in a financial vacuum. They recognize that they will be judged on the basis of economic results of the firm and yet they do not really comprehend the connection between the things they do on a day to day basis and the profit and loss and balance sheet. This would appear to be crazy.

Managers need not become accountants. Nevertheless, there is certainly a level of competence that will improve  their decisions and the return on investment. Financial understanding for managers encompasses an understanding of the the real forces behind the numbers.

• suppliers offering faster delivery, changes in customer ordering, economic downturns
• training courses - costs increase but where is the return?
  
• raising stock levels for quick delivery
• investment in new plant reducing cash flow
  

Finance for managers needs to reach beyond the basic financial statements. To begin with, the profit and loss and balance sheet are historic. Operating your  organization on the basis of last period’s results is like looking backwards as you walk.

Of perhaps greater significance is the fact that today it is intangibles that are responsible for performance – culture, brand, skills and relationships. These vital assets are not even in the profit and loss and balance sheet and yet in most businesses they constitute most of  the value: Financial awareness for managers should mirror reality.

Managers need to distinguish between real growth and accounting profits. Therefore managers need to understand principles such as:

• value mamennaget – this means looking beyond the short-term. Shareholders are interested in their return over several  years, not just this month. With a knowledge of shareholder value, managers can decide to invest in brand, training or IT despite this meaning a reduction in this quarter's profits.
• key performance indicators – common financial measurements track “symptoms” not “drivers”. Thus: a lowering of contribution margin tells you  that you are making less on each sale but it does not tell you why. However, analysing “performance drivers” – for example, how quickly staff respond to customer emails – will point towards “causes”.  Financial understanding for managers needs to bring together  soft drivers and financial results. Research suggests that managers that are able to do this produce significantly better returns on investment over a five-year period than those that do not.
• sensitivity models – managers must recognize the relative impact of real world inputs, such as an increase in the average time it  takes for customers to pay or reducing the number of sales people. In other words they need to have answers to the “what-if” questions.

Far too many Finance for managers courses concentrate on analysing financial statements. The ability to calculate 20 different ratios does not  provide real perspective. The best means to develop this insight is for managers to create a working model with inputs – debtor days, marketing response rates, margins – and outputs – profit and loss, balance sheet and cashflow. Managers may then change the inputs to mirror the type of decisions that they make on a day-to-day basis and instantaneously view the impact on the bottom-line.

Financial understanding for managers courses should not aim to transform managers into accountants; training should give managers with realistic financial perspective and practical tools that they can use to deliver maximum return on investment.