Business leaders do not start their organization hoping to spend a lot of time doing accounting and finance, but rather doing what they do best, filling an unmet need or providing a great new service. All leaders, however, need to have a high level of financial intelligence to know they are making the best possible decisions for their business. In addition, the more financial intelligence their employees have, the better the smaller decisions, that are made every day in the organization, will be.
Financial intelligence, although it is a recently defined term, has its roots back in 1954, when the management guru Peter Drucker wrote in his groundbreaking book, The Practice of Management, “The worker should know how his work relates to the work of the whole. He should know what he contributes to the enterprise…if he lacks information, he will lack both incentive and means to improve his performance… it is in the best interest of the organization that the worker has the information”. One piece of this information that Drucker was talking about is financial information. It is not enough that the employee has the information, but that the employee knows what it means and what to do with it.
Proponents of financial intelligence in organizations believe that if all employees understood financial information and how it is measured, then they would make decisions and take actions based upon this financial understanding to the benefit of the organization. If everyone knows the mission and goals of the organization and knows how the decisions they make help achieve these goals, the organization would be far better off.
Financial intelligence relates to the knowledge and skills of accounting and financial principles. It is not just theoretical knowledge, however, but requires practical real world application and experience. Overall financial intelligence requires understanding four key attributes:
- The Foundation: One must understand the basics of business measurement including the Income Statement, the Balance Sheet and the Cash Flow Statement. It also requires knowing the difference between cash and profit (there is a big difference), and why a balance sheet balances.
- The Art: Finance and accounting are both art and science. The two disciplines rely on estimates, assumptions, and rules to accomplish the end result. Financial intelligence ensures that one can identify where assumptions have been applied to the numbers and how applying different assumptions can lead to different conclusions. Understanding the assumptions behind a budget or forecast is critical to helping you make adjustments to your business when things don’t turn out the way you thought.
- Analysis: Financial intelligence means you know how to analyze the numbers to gain a deeper understanding of their meaning. This includes the ability to calculate surpluses, leverage, liquidity and various efficiency ratios and key indicators. When you understand the factors that make a program generate healthy surpluses, and how that factors into the overall success of your organization, you make better strategic decisions.
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