WHY MANAGERS NEED A FINANCIAL EDUCATION

Business Finance for Managers


by

Maurice B. Goudzwaard Ph.D*

All managers need a financial perspective in order to manage effectively. Regardless of a manager's specialty, be it in Marketing, Production, Communication or Data Processing, managers cannot afford the luxury of being oblivious to the financial imperatives that drive a business today. Because if managers don't know the language of business finance, they can't play the game, and they won't come out on top.

Why do you as a manager need a financial perspective? You need it in order to communicate what you are planning to do and what you are hoping to achieve in language the financial officer understands. Things like profit, value, economic value added (EVA), Discounted Cash Flow (DCF), RoIs, and the like. These are the words the financial people understand, and it is in everyone's best interest to get into it. Without knowing the jargon, you are flailing. With it, you have a chance.

Business is driven today by numbers: Budgets, returns, profits, RoI and Value Added -- those are the key buzzwords. Companies whose shares are publicly traded are particularly driven by the numbers.

To illustrate how important the financial perspective is today, I think it fair to say that many chief executives and financial officers of publicly traded companies spend as much time meeting with financial analysts trying to convince them to purchase their shares as they do actually running the operations of a business. Sad to say it, but many financial officers and top manager are glorified hawkers of their common shares.

The market makers who buy and sell equity shares do not take kindly to firms who don't experience ever rising profits, quarter by quarter. There isn't time for managers to take a breather. Hence, top managers are under tremendous pressure to show higher profits every quarter, and this filters down to all managerial levels.

Because most businesses are cyclical and because financial analysts don't like declining earnings, this means that in some periods, there will be delays in new equipment purchases, R&D investments, etc.; because if undertaken now, they might temporarily dampen this quarter's earnings. And this is a no-no.

How can you understand the numbers game? By being literate on what drives a company. Know what constitutes profit and what does not. Does the repaying of a loan reduce profit? No. Does it reduceliquidity? Yes. Which is more important?-- Profitability or liquidity? It depends.

Does the full amount of money spent on R&D reduce profit this quarter? Yes. Should it? Probably not? Why?

Is money spent on computer software an "expense" this period or is it an "Asset"? Good Question. Does the decision of whether or not to show it as an investment or expense impact this quarter's profit? Yes. Should its immediate impact on current profit determine whether or not the investment is made now? Probably not. But it does.

What is RoI ---- Return on Investment? And how high should it be? The answer depends on how you define RoI. Do we mean return on total investment? Do we mean return on Shareholders's equity? Or do we mean return on total long term capital? What numbers are "good enough"? Probably 15-20% -- but how do you know? Does the nature and the level of business and financial risk in a business have anything to do with the expected level of RoI? Yes, indeed it does.

What is Economic Value Added or EVA? What is so different about that measure of corporate performance as compared to just plain "net profit"? Is EVA just a fad that will go away? Is EVA "new", or is it just "old wine in new bottles?" How much long term debt is proper for a company? When does a firm have too much debt? Or too little debt?

How does a company balance the need for adequate liquidity to pay its bills on time, and its need to use as much money capital as possible in profit earning investment?

Without a financial perspective you can't be an effective salesperson. Managers today must know the language and the main ideas of finance if they are to sell their products and services to people who are literate in finance. This means you must keep up with the financial orientation of your customers. You must be able to convince your customers that it is in their best financial interests to purchase what you are selling. You simply must talk their language.

It is unlikely that you are going to be promoted in your organization if you aren't financially fit. You can't actively participate in committee meetings today if you don't have a financial vocabulary.

Why don't all managers have this financial perspective? Maybe they are short on time, or perhaps, just perhaps, they are afraid of finance!!!! Fear of finance?! Yes, it is real!!! But a fear that is so unwarranted!!!! Unwarranted because it is so easy to overcome.

You don't need an MBA in Finance to know the basics. Learn the fundamentals by reading a easy-to-understand finance book -- (if you can find one) -- or enroll is a two or three day seminar and learn finance in a non-threatening way. Focus on the subject for two or three days, and you will be surprised what you will learn, and you will surprise yourself about your own aptitude for finance. A lost cause you thought. Not so.

In Professor Goudzwaard's seminars on Finance and Account for Non-Financial Managers, andFinancial Tools that Build Value, you will learn college level FINANCE in a painless and easy to understand manner.

After all, you can only get better and improve. All managers must understand these dynamics. You can't succeed without them. Don't be left behind. Get a financial perspective.

Its important to your company, its important to your career, and its easy and painless to obtain. Do it now.

Maurice B. Goudzwaard Ph.D
Financial Education Ltd.