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Financial Intelligence - Jun 18, 2009

Posted by: Phil Elworth in Articles

Owners do not start their businesses hoping to spend a lot of time on accounting and finance but rather to do what they do best. All owners, however, need to have a high enough level of financial intelligence to know they are making the best possible decisions for their business. In addition, the more financial intelligence their employees have, the better the decisions of the organization will be as a whole.

Financial intelligence, although it is a recently defined term, has its roots back in 1954 when the management guru, Peter Drucker wrote in his groundbreaking book, The Practice of Management, "[The worker] should know how his work relates to the work of the whole. He should know what he contributes to the enterprise...if he lacks information, he will lack both incentive and means to improve his performance." "It is in the best interest of the organization that the worker has the information". One piece of this information that Drucker was talking about is financial information. But it is not enough that the employee has the information, but that the employee knows what it means and what to do with it.

Proponents of financial intelligence in organizations believe that if all employees understood financial information and how it is measured, then they will make decisions and take actions based upon this financial understanding, to the benefit of the organization. If everyone knows the mission and goals of the organization and knows how the decisions they make help achieve these goals, the organization will be far better off.

Financial intelligence relates to the knowledge and skills of accounting and financial principals. It is not just theoretical knowledge, however, but requires practical real world application and experience. Overall financial intelligence requires understanding four key attributes:

1. The Foundation: One must understand the basics of business measurement including the Income Statement, the Balance Sheet and the Cash Flow Statement. It also requires knowing the difference between cash and profit and why a balance sheet balances.
2. The Art: Finance and accounting are both art and science. The two disciplines rely on estimates, assumptions and rules to accomplish the end result. Financial intelligence ensures that one can identify where assumptions have been applied to the numbers and how applying different assumptions can lead to different conclusions.
3. Analysis: Financial intelligence means you know how to analyze the numbers to gain a deeper understanding of their meaning. The ability to calculate profitability, leverage, liquidity and various efficiency rations and key indicators.
4. The Big picture: Financial intelligence means you can understand a business's financial results in the context of the big picture; the overall economy, the competitive environment, regulations and changing customer needs.

Owners, managers and employees in general, who understand these principals and the effect of their decisions on the organization, will provide a competitive advantage to their employer.