Harvard Business Review (March 31, 2017)
By Rebeeca Knight
If you’re not a numbers person, finance is daunting. But having a grasp of terms like EBITDA and net present value are important no matter where you sit on the org chart. How can you boost your financial acumen? How do you decide which concepts are most important to understand to your work and your understanding of the business? And who’s in the best position to offer advice?
What the Experts Say
Even if you don’t need to know a lot about finance to do your day-to-day job, the more conversant you are on the subject, the better off you’ll be, according to Richard Ruback, a professor at Harvard Business School and the coauthor of the “HBR Guide to Buying a Small Business”. “If you can speak the language of money, you will be more successful,” he says. After all, if you’re trying to sell a product or strategy, you need to be able to demonstrate that it is both practical and high margin. “The decision-makers will want to see a simple model that shows revenue, costs, overhead, and cash flow,” he says. “They need to see why it’s a good idea.” Joe Knight, a partner and senior consultant at the Business Literacy Institute and the coauthor of “Financial Intelligence”, says that an absence of financial savvy is “career-limiting.” If you’re unable to contribute to a discussion on the company’s performance, you’re unlikely to advance. “You are not going to be involved in running projects unless you understand the financials,” he says. Here are some strategies to improve your financial intelligence.
Overcome your fears
Stop avoiding finance because you’re afraid of numbers. It’s not rocket science, says Ruback. Think of it this way, “Finance is the way businesses keep score. It’s like counting balls and strikes in baseball,” but instead you’re “measuring progress through financial performance,” he says. “It’s not that complicated.” Besides, the math is easier than you might think, says Knight. “Finance and accounting are very simple. It’s mostly addition and subtraction and occasionally some multiplication and division,” he says. “There’s no magic.”
Learn the lingo
There may not be any magic to finance, but there is a fair amount of jargon. Fortunately, there are many ways to learn the terminology, says Knight. You “just need to take initiative,” he says. If your company offers internal finance training, take advantage of it. If it doesn’t, consider enrolling in an online or community college class. Of course, there are also myriad books and reference guides on the topic. The most important concepts to grasp are “how to measure profitability, EBITDA, operating income, revenue, and operating expenses,” he says. A finance textbook or reference guide is a good investment; but “Google works too,” he says.
Tackle the balance sheet
Next, says Knight, you need to immerse yourself in your organization’s income statements. “Take an interest in the balance sheet and then do the due diligence to understand it,” he says. The best way to learn, says Ruback, is to “reproduce the numbers” either electronically or on a sheet of paper and then “group them into categories so you can start to see how much your company spends and where it makes money,” he says. Convert the numbers to percentages so you more easily visualize the breakdown of revenue and expenditures. “You want to see the big picture.”
Focus on key metrics
Boosting your financial expertise requires figuring out the metrics by which your company measures success. Your goal is to develop a deep understanding of the precise “link between profit and loss” and how that affects your organization’s performance over time, says Knight. That metric is often expressed in the form of a ratio. “There are four ratios common in every company: profitability, leverage, liquidity, and operational efficiency,” he says. And every organization has “two or three ratios within” those groups that are considered its primary measures of performance, in addition to “industry-specific ratios.” Paying closer attention to your company’s balance sheet and “listening to your company’s quarterly earnings calls” is helpful in getting a handle on these metrics. “They’re not hard to calculate. It just takes effort,” he says.
Play with numbers
Once you have a solid understanding of the balance sheet and what drives your company’s growth, try “experimenting and playing with the numbers” by going through a “series of ‘what if?’ scenarios,” says Ruback. For instance, What if prices were lower? What if revenue was higher? What if costs go down or up? “You’re not managing specific business decisions, you’re trying to understand and internalize how the models work” and the assumptions they make. That way, when you do need to “tabulate the consequence of a particular decision,” such as, whether or not to launch a new product or shut down a factory, you have the tools to do so. “People think budgets are static. But in most instances, you run the models to figure out what’s important and how much room there is for error.”
Find a financial mentor
Connecting with a “senior financial or operations manager” who can “teach you,” and “answer your questions one-on-one” is another way to get better at finance, says Knight. “It’s a very natural way to learn,” he adds. Ruback agrees. “Mentors are always helpful for someone who is not good with numbers,” he says. This person can both help explain concepts and serve as a sounding board for any financial decisions you need to make. Ruback suggests asking your colleague “to try to replicate” your projections and models when needed. “It sharpens your focus,” he says. “You find that Jane made certain assumptions, while you made others. One is not right and the other is not wrong, but [the differences] help you figure out what’s reasonable.”
Make it personal
Still lacking motivation? Make improving your financial skills, says Knight. “Every time you are paid, your organization makes less profit. So you need to think about what you can do to help the company remain profitable or be more so.” The goal is to develop an understanding of how your day-to-day actions help your employer to “drive revenue or mitigate costs,” he says. “Think of yourself as a miniature profit and loss statement: How do you add value?” This can be a useful exercise, but don’t let it consume you, says Ruback. After all, it’s easier to determine your impact on the bottom line if you’re in sales, but it’s not as straightforward if you’re in, say, HR. “Integrate your role with the contributions of others,” he says, “and focus on the problems you can control, not the ones you can’t.”