The Importance of Business Acumen Training
Organizations today, more than ever in these tough economic times, need managers and employees who can contribute to the financial success of their business. They need them to think and act like business owners. That’s why finance departments are being increasingly challenged to offer financial literacy training. However, finance courses that focus exclusively on financial terminology and financial statements aren’t enough. Instead, developing the business acumen of employees — going beyond financial literacy to a true understanding of what it takes for a business to make money and how everyone’s actions impact the financials — is the key to producing real results.
Business Acumen: A Definition
Very simply, business acumen is the understanding of ‘How a business makes money’. It involves financial literacy, which is an understanding of the numbers on financial statements, as well as an understanding of the strategies, decisions and actions that impact these numbers. Someone with financial literacy, for example, would be able to 'read' the company’s income statement. This employee or manager would understand basic financial terminology (e.g. sales, cost of sales, gross margin, profit, etc.) and what the numbers represent (i.e. gross margin equals sales less cost of sales).
With business acumen, the individual would be able to “interpret” this same financial statement, and understand how their own actions, as well as company strategies and initiatives, impact the numbers.
Consider a simple comparison: In a football match, it’s necessary for players to know the rules and how the game is scored as well as how to play the game to change the score. In business, financial literacy is understanding the 'score' (financial statements) and business acumen is understanding how to impact it (strategic actions and decisions).
The Challenge for Finance & HR
The message to Finance and HR Directors is clear. Management wants the Finance team to produce reports that:
- Allow the employees to make good business decisions
- Align employee actions with the organization’s strategic objectives.
No employee wants to make a bad decision that impacts the profitability of the business. For example, consider the employee in charge of maintaining the tool room. He or she feels very satisfied with their job performance provided the appropriate spare parts are in stock when they are needed on the floor. He/she might not realize, however, the impact of having excessive spare parts inventory ('just in case') on working capital or the future obsolescence issue that may arise.
Educating this employee on the financial consequences of inventory level decisions and actions is fundamental to business alignment.
Once the organisations strategic objectives and goals are established, HR and Training must ensure that educational offerings are aligned with them and contribute to their achievement. That means helping employees understand the goals and developing the knowledge and skills that will be required.
And at the most basic level of alignment, they should ensure that every employee understands:
- How the company makes money
- How cash is generated and utilized to achieve goals
- How their own day-to-day actions and decisions impact bottom-line success
Unfortunately, in many organizations today, managers and employees have not been educated about the big picture of their businesses. They have a narrow focus on their own departments and job functions and aren’t able to make the link between their actions and the company’s success. This means that too many decisions are being made and too many actions are being taken that don’t align with business objectives.
For many companies around the world, implementing training in financial literacy and business acumen has helped bridge this gap. Here’s one story.
Southwest Airlines: Business Acumen as Part of its Culture
Consider Southwest Airlines, which was founded in 1971. The airline has become widely recognized for the motivational culture it creates for employees and its extraordinary dedication to customer service. Much of the industry has suffered during the years of Southwest’s growth, including many airlines that have merged or declared bankruptcy. Southwest buys the same planes and the same jet fuel as other airlines, and pays its employees competitive wages and benefits. What’s the difference?
Unlike some of its competitors, Southwest’s management team involves employees in the company’s financial results, explaining what the numbers mean and, more important, helping to link everyone’s decisions and actions to the bottom line. The airline has an open culture, one of inclusion at all levels, and employees understand their roles in providing great service and keeping costs in line. Certainly there are other factors that contribute to the success at Southwest, but it’s difficult to ignore the positive impact of an approach that develops the business acumen of all employees and managers so that they can contribute to the airline’s success.
According to Elizabeth Bryant, director of leadership training at Southwest Airlines: 'Our training covers how the financial ratios such as return on assets and various margins are determined. Knowing that managers, supervisors and all employees have this knowledge enables the company’s leadership to present detailed financial reports and explain to the teams where the margins need to be.
In other words, Southwest invests in training to help employees think like business owners. This, in turn, produces real results, like its consistently low cost-per-seat mile. We explained that if you understand what the numbers mean then you can better understand how your work provides an integral contribution to the business.'
Asking the Right Questions
When business acumen spreads through an organization, employees and managers begin to ask the right questions. These questions are directed not only at the organization, but also at themselves and their departments —questions about processes, products, systems, staffing and more can lead to necessary and innovative decisions and actions.
For example, questions that could get to the root of disappointing operating ratios include:
- Why have production costs gone up?
- How would a price change impact our margins?
- How do we compare both internally against other plants or business units and externally against our competitors?
- If our costs per unit produced have gone up, can we better control the efficiency of our production or service delivery?
When employees are asking the right questions from their managers, the Finance group or senior leaders, they become engaged in the process of impacting financial results, leading to more innovative ideas and better decisions.
Business Acumen for Managers
Managers at all levels need a high level of business acumen to do their jobs. Every day they make decisions, many involving large sums of money. Managers who make these decisions with a limited understanding of how they will affect financial results or with a lack of clarity about how they are tied to the organization’s goals and objectives are working in silos that can ultimately damage the company.
In addition, managers are often promoted to their positions of responsibility because of their 'technical' expertise. They’ve been successful customer representatives, great salespeople, innovative researchers or well respected IT professionals. They are now entrusted with decision making, budgets, projects and people. They often do not have financial literacy, nor have they developed a higher-level perspective about the business. Over time, especially if they move up the managerial ladder, they may develop these. Or they may not. Why leave it to chance?
Business Acumen for Employees
Although there is little debate about the need for managers to develop business acumen, organizations sometimes question the need for this understanding at employee levels. But frontline contributors, those who are most directly involved with production or customer service, for example, take actions that impact business results.
Consider the salesperson who discounts products, or the maintenance person who orders a new part instead of repairing the old. The actions taken by each of them has a financial impact. No employee deliberately sets out to make a bad financial decision. However, without an understanding of how their actions impact the company’s results, they might not have the context to consider alternatives.
In his book Good to Great, Jim Collins says: 'We found no evidence that the ‘good-to-great’ companies had more or better information than the comparison companies. None. Both sets of companies had virtually identical access to good information. The key, then, lies not in better information, but in turning information into information that cannot be ignored.' 1
Case study: Ensuring financial input into the business decision making process
During a business acumen session with a retail client company, some of the representatives from the marketing department explained how they recently spent €10,000 on a campaign for a new product launch. The initial reaction of the marketing group was: 'Advertising is expensive'. But after the group finished calculating the company’s Net income at just over 5 percent, they realized that they would have to sell €200,000 of the new product just to cover the cost of the campaign. The group agreed that if they knew this up-front, it would have forced them to evaluate the advertising spend further.
Former GE chairman Jack Welch said in his book Straight from the Gut: 'Getting every employee’s mind into the game is a huge part of what the CEO job is all about…There’s nothing more important.'
The Big Picture
How often do we see departments, employees and sometimes even entire divisions or subsidiaries becoming so immersed in their own objectives that they don’t take into account how their decisions impact other departments and the company as a whole? They protect their own budgets and their activities are not aligned to the company’s goals. Ultimately, the business either downsizes, outsources or eliminates the non-aligned units.
Leading organizations develop their people in ways that focus them on the right targets and ensure that everyone’s actions are aligned to the company’s overall objectives. When they do this well, they see these outcomes:
- Employees begin to think and act like business owners.
- Departments focus on cutting waste and not just costs.
- A culture of accountability is created within the organization
- There is increased innovation.
- Employees are more engaged, they understand their roles and their impact on business results, and they are more likely to believe that their efforts really matter.
So how can a company develop the business acumen of its people?
Developing Business Acumen: Finance becoming true Business Partners
Books and reading can help, but business acumen is best developed experientially. Long lectures just do not work, as employees just switch off. Learners must be able to analyze situations, ask questions, discuss ideas with other learners, consider options, make mistakes and see results.
The Classroom Advantage
Southwest Airlines chose to develop the business acumen of managers and employees by using a classroom-based simulation, facilitated by instructors at company sites. Although online options were available and were used in some cases to supplement the instructor-led training sessions, they decided that there were significant advantages to tackling this subject in a “live” session where they could leverage the power of:
- Shared knowledge and experience: Learners bring their own perspectives and issues to the session.
- Teamwork: Learners work together, make decisions together and rely on each other as they learn.
- Competitive fun: Small teams “play” against each other and enjoy a competitive environment.
- Company-specific discussions: The learners’ common interest in their own company’s financial and strategic issues allows for greater analysis and depth of discussions and a true “connection” between the learning simulation and the organization’s reality.
- Learning motivation and comfort: Learners who may not be comfortable with the subject of finance find themselves playing a game in the comfort of a team environment.
Although there are a number of educational approaches available to organizations in the area of business acumen, classroom-based training that brings together teams of learners can help ensure that learning occurs and that connections to the business are made in ways that prompt action back on the job.
The Bottom Line
More than ever, successful companies will need to focus on developing the business acumen of managers and employees. These companies will realise that when employees understand the numbers and how their departments contribute to the company’s objectives and when they see how their own decisions and actions make a difference, they will begin to operate as part of a team rather than in a departmental or personal silo. And a critical piece of the alignment puzzle will be solved.
With widespread business acumen, companies can have a powerful asset — educated, knowledgeable and motivated employees. And with this asset, those will be the companies best positioned to succeed.
References
1 Collins, Jim. Good to Great. 2001. HarperCollins Publishers.
2. Stack, Jack. The Great Game of Business. 1994 Currency Doubleday
About Paradigm Learning
Paradigm Learning (www.ParadigmLearning.com) is a privately held company based in Tampa, Florida. Since 1994, it has worked with more than 600 of the Fortune 1000 companies, creating award-winning business games, simulations and Discovery Maps® to address a company’s specific business needs. Paradigm Learning combines the power of business board games and business simulations to create classroom-based learning experiences that are fun, challenging and content-rich. Training programs for managers and employees target strategic issues such as business acumen, talent leadership, leadership accountability, organizational change, sales effectiveness and project management.
