The formula for business success
It’s a million-dollar question: “What must I do to have, or run, a successful business?” We hear it often in our meetings and training programs with Fortune 500 executives. Here are some insights into the answer.
One way to keep it simple is to recognize that every company consists of only four things: cash, property, contacts and people. The good news is that there is a financial statement that keeps track of cash (cash statement) property (balance sheet) and contracts (income statement). The bad news is that your company’s most important asset, its people, rarely understand the relationships of these three statements or how their daily activities impact them and the company’s financial results.
What are the objectives of a business that create success?
Property means assets. A business has assets – material assets, intangible assets and human assets. There is only one reason to have assets – and that is to produce sales. Then, you must be highly efficient at converting those sales into profits. This is accomplished through effective cost management. Next, profit must be converted into cash (Profit does not equal cash). Then, your company makes decisions on what to do next with that extra cash.
So to run a successful business, every manager and key non-financial professional must have what we call “Financial and Business Intelligence.”
Fundamentally, Financial and Business Intelligence boils down to four distinct skill sets, and if you are a manager at ANY level in a company, you need be competent in all of them:
• Understanding the foundation-Financial Intelligence: Managers who are financially intelligent understand the basics of financial measurement. They can read an income statement, a balance sheet, and a cash flow statement. They know the difference between profit and cash. They know the underlying principles of accounting. The numbers neither scare nor mystify them.
• Understanding analysis-Moving from Intelligence to Action: Once you have the foundation you can use the information to analyze the numbers in greater depth. Financially intelligent managers don’t shrink from ratios that provide important measures of profit margins, working capital, return on invested capital, etc.They use these analysis tools to make better decisions.
• Understanding the art-Business Intelligence and Value Creation: Finance and analysis provide the foundation and the science of the numbers. They quantify however, some things can’t be quantified. Great managers are able to identify the artful aspects of finance and business. They thus are prepared, when appropriate, to question and challenge the numbers. This involves understanding how their behavior affects value-creating activities, how to make cost-value trade-offs, and what process improvements need to be made to improve margins and cash flow.
• Understanding the big picture: Finally, although we teach financial and business intelligence and know that everyone should understand the numbers side of business, these still don’t tell the whole story. A business’s financial results must always be understood in context-that is, within the framework of the big picture. External factors such as the economy, the competitive environment, regulations, changing customer needs and expectations, new technologies, etc. all affect how numbers are interpreted and what decisions must be made.
Financial and Business Intelligence don’t stop with book learning. Like most disciplines and skill sets, they must not only be learned, but must also be practiced and applied.
Want to improve your Financial Intelligence? Join us Tuesday, April 3 for our one-day interactive program that delivers the fundamentals of finance, accounting and financial analysis-giving you a fun, simple hands-on experience of financial management. Go here for more info.