Linking Financial Acumen to Business Performance

By Paul Vorbach, Managing Director, AcademyGlobal Pty Ltd

The Oxford Dictionary defines acumen as ‘the ability to make good judgments and make quick decisions’. According to the dictionary, the word is derived from the Latin verb ‘acuere’: ‘to sharpen’.

The acquisition of financial acumen hinges on the combination of many factors, including on-the-job experience and continuous learning. Whilst such learning may begin with a university degree, research shows that specialised training addressing specific training needs is more effective. Context matters: the ability to understand and decipher the interplay between numbers, people, process and technology on an organisation-wide dimension and scale is critical.

It is intuitive to believe that for an organisation to be successful, well-intentioned staff will possess an understanding of what generates profit, and in turn act in a manner that supports its maximisation. Conversely, when employees are not trained in financial acuity, it follows that poor business decisions are more likely.

From correlation to causation

Importantly, causal links are now increasingly being identified to test the long acknowledged correlation observed between the financial expertise and the firm’s financial policies and performance. Fortunately, it is clear that financial acumen is a skill that can be learnt.

A major conclusion of these studies suggests a strong positive association between financial literacy and financial outcomes. Further, recent empirical evidence suggests a strong correlation between financial literacy and behaviour (Cole, Sampson and Zia, 2009), and that an important determinant of stock market participation is financial literacy (Van Rooij, Lusardi and Alessie, 2007).

The literature also suggests that individuals with more financial knowledge are more likely to engage in a wide range of recommended financial practices (Hilgert, Hogarth and Beverley, 2003).

More recent international academic studies suggest not only that management practices are important drivers of firm-level productivity, but also that managers with financial expertise allocate their firms’ financial resources more efficiently.

Specifically, managers with financial acumen hold less cash, apply debt more thoughtfully, and are more sophisticated in using appropriate discount rates when evaluating projects. They are also more effective at communicating with analysts and more successful at acquiring access to outside financing when facing limited credit supply (Custodio, Mendes, and Metzger, 2016).

Financial acumen is complex. To create economic value for an organisation, you must understand and manage multiple financial indicators around goals, products, stakeholders, platforms, resources, regulations, geographies and time zones, and markets effectively.

Being able to understand not only the numbers in your financial statements, but also to deploy and manage your limited resources of people, time, and funding; while adhering to governance, risk management and compliance requirements and regulations, keeping up to date with competitors, recalibrating new technologies, and delivering to customers at higher levels of quality, can be truly daunting.

Financial acumen can be evaluated across three pillars: financial, business quality and global skills (Theodotou, 2014):

1.    Financial skills include strengthening core financial literacy concepts and metrics, streamlining processes such as budgeting, forecasting, and reporting, and stepping up compliance.

2.    Business quality skills sharpen your ability to keep your house in order and work efficiently by managing costs and resources, focusing on process quality, standards, tools, and metrics, driving efficiency, shorter cycles, managing resources, and understanding technology trends.

3.    Global skills include analysing local, regional, and global markets and product trends, deciphering competitive intelligence, understanding the importance of governance, risk, and compliance; building a sound corporate responsibility strategy and a broader sustainability strategy for the growth of your organisation into the future.

The common thread in all these functions is a keen understanding of the numbers in your line of business. Mastering the numbers enables sound and timely decision-making. Developing these skills, and more importantly seeking cross-pollination amongst them, is an indispensable criterion for success for both the individual and the organisation.

Training interventions to consider

·     Intensive single-day training session for department heads. The facilitator discusses finance basics. At the end of each day, ask each department head to turn in a list of areas in which they have not been speaking the same financial language (Theodotou, 2014).

·     After the training session, assign each department head the task of speaking with employees in their departments about financial acumen. Encourage them to use simpler language, for those employees who lack a background in finance.

·     Assess current investments and profit figures against the current budget. Are the numbers the same? If not, what is the cause of the discrepancy? Initiate a plan to reconcile the numbers by the end of the next quarter.

·     As a business manager, evaluate the financial reporting structure used by each department. If not consistent, assemble a team to identify which items need to be consistently reported, and then create and distribute templates so that during the next reporting period the financial results are accurate.

·     For one month, send staff members a weekly email newsletter of tips to improve financial acumen. Include key terms and definitions relevant to the organisation and industry, answers to frequently asked questions, and examples from real-world scenarios.

After senior management roles at Deloitte and Citi, the author founded AcademyGlobal in Sydney in 2004, an executive development firm with assignments ranging across 20 countries on 5 continents.

References

Adomako, S., and Albert, D., (2014). Financial Literacy and Firm performance: The moderating role of financial capital availability and resource flexibility., International Journal of Management & Organisational Studies, 3 (4).

Cole, S, Sampson, T and Zia, B. (2009). Financial Literacy, Financial Decisions and the Demand for Financial Services. Harvard Business School Working Paper 09-117.

Custódio, C., Mendes, D.M, Metzger, D. (2016), Financial literacy of managers and efficiency of capital allocation in corporations, International Growth Centre, viewed 21 February, 2017, http://www.theigc.org/project/financial-literacy-of-managers-and-the-efficiency-of-capital-allocation-in-corporations/

Hilgert, M., Hogarth, J and Beverly, S. (2003). Household financial management: the connection between knowledge and behaviour, Federal Reserve Bulletin, 89(7): 309-22.

Theodotou, M., (2014), 3 Financial Acumen Skills You Don’t Want to Ignore, American Management Association, viewed 21 February 2017, http://www.amanet.org/training/articles/3-Financial-Acumen-Skills-You-Dont-Want-to-Ignore.aspx

Van Rooij, M., Lusardi, A. and Alessie, R. (2007), Financial literacy and stock market participation, NBER Working Paper, 13565.

5 Hard Truths: What wannabe startup entrepreneurs should know.

By Paul Vorbach, Managing Director, AcademyGlobal Pty Ltd

With so much excitement around innovation, startups and entrepreneurship, I thought it timely to share a few sobering reflections on the realities of small business. They’re based on 15 years of establishing businesses, following a decade in large corporations including Deloitte and Citi.

  1. You are small, weak and vulnerable. Get used to it. You won’t be for long – if you survive. But for now at least – you are. Some might prey on this vulnerability. Service providers to small businesses are usually expensive. Some may seek to exploit your lack of time, knowledge and experience. The pricing and contractual terms are often vastly different to what I would have accepted wearing a corporate hat (and supported by legal counsel and other specialist expertise). Expect lopsided contract terms, low on flexibility and high overall costs from: a) serviced office providers, b) factoring and invoice discounting companies, c) technology and equipment leasing businesses and d) and any unsecured financiers.
  2. Your personality makes you susceptible. Most entrepreneurs are extravert, optimistic and opportunity seeking. You probably need to be! Unfortunately, these personality traits are rarely accompanied by high levels of attention to detail. The problem is that in any business, missing a critical detail can be enough to put you under – either directly through legal action, or indirectly – through shear exhaustion. Fail to meet a deadline and expect that once friendly service-provider to become an aggressive litigant issuing letters of demand and making a wide-range of legal threats. If you have outsourced your collections to a “business finance” organisation they will chase your customers with little regard to your hard-won relationships. By contrast, in a corporate setting systems, policies and controls will usually be overseen by an appropriately trained staffer. In big companies the extravert, big picture “ideas-person” can be supported (moderated), so the firm enjoys a much higher level of protection.
  3. Someone must do the menial stuff. If you don’t get your basic business compliance burdens right – accurately, on-time and cost effectively you will fail. In a large business there is usually someone to take care of it; HR manager, company secretary, in-house legal counsel, finance director, compliance staff, quality manager… In your startup, who’s going to do it? You? Not likely and certainly not realistically given the other demands on your time and your likely disposition (see above). In fact if you were to focus on this, the question is who is developing new customers, new solutions and generally promoting your business? So what are the critical compliance risks? There are at least three: tax, staff entitlements and critical contractual obligations on key supplies. Get good, timely advice as cost effectively as possible. Pick advisers that your business will matter to. Avoid the big firms – you will pay handsomely and likely be neglected.
  4. Who are you? Big business, media, government and other institutions will likely dismiss you (for now). It’s not until your startup flourishes and has real impact that others outside your tiny circle will take notice. Once you succeed the established businesses, university business-schools and media will fawn over you like sycophants. Especially, if you’ve come from a management role in a large corporate beware! You no longer have business cards and an email signature underpinning your status with a big respected firm. You have no clout. Phone calls and emails will go un-returned. Common levels of basic professional courtesy extended between staff of big firms, academia and government are reframed and you’ll learn quickly where you are on the pecking-order.
  5. It’s still worth it! If you’re not too disparaged – and still reading this, know that it really can be worth the journey. Yes, it can be hard on your family, on your ego and on your finances. But the opportunity for true self-determination lies at the heart of this ambition. There is no parallel liberty for any employee-numbered staffer. No c-suite executive, elected official, faculty dean or government bureaucrat has the freedom of expression and unbridled choice to pursue their passions as you will.

And in doing so, you will create exciting opportunities for new colleagues and partners, solve real problems for hard-won customers and contribute to the vital engine room of our community.

The author has established, failed and succeeded in startups across property finance, investment consulting and management training. He founded AcademyGlobal in Sydney in 2004, an executive development firm with assignments ranging across 20 countries on 5 continents.

Conduct Risk

By Richard Walker, Senior Consultant, AcademyGlobal Pty Ltd

You don’t have to work in financial markets to be aware of conduct risk. There are a multitude of very public examples that illustrate the fallout when conduct risk goes wrong. The media is awash with stories about foreign exchange and LIBOR benchmarks rigging, and the multi-billion dollar fines levied by regulators.

The Australian Securities and Investments Commission (ASIC) is currently looking into the behaviours of institutions who participate in the benchmark BBSW.  Again, with a domestic focus, allegations of insider trading and suspected front-running at a major financial planner have received publicity; on prime-time television the ABC aired an investigative report into yet another prominent financial planning group; and individuals have recently been found guilty of insider trading. Perhaps most worrisome is that these are not isolated events, and it appears their occurrence grows every day.

Given the focus that domestic and international regulators are placing on conduct risk, organisations that are either unwilling, or unable to demonstrate that they are actively taking steps to eradicate misconduct can expect attention from their regulator.

Your call to action

Are you confident in your organisations ability to manage conduct risk? Academy Global offer a number of interactive risk management courses to improve the effectiveness of your risk management process.