The Importance of Business Acumen for High Performance

The Importance of Business Acumen

If you want to create a high performance culture, you’d better understand the importance of business acumen and the financials behind the business.  It is not just the purview of finance to interpret the numbers that govern profit and loss; it behooves every employee to understand how and why the company makes money, spends money, and measures financial performance.

True business acumen is about more than understanding your P&L.  True business acumen is being able to think and act like a business owner.  You will know that you have true business acumen when you have an in-depth understanding of how your business works, how it makes money, and most importantly for leaders, how specific strategies and decisions impact business results.

A Lack of Business Acumen Exists
We believe that employees need to better understand the key factors that affect a company’s operations and financial strength to improve decision-making and strategy execution.

• A recent study by the Economist Intelligence Unit found that 2-out-of-every-3 executives believe that a lack of business acumen inhibits speed in decision-making and achieving strategic priorities.
• A McKinsey survey of over 1,500 corporate directors revealed that only 36 percent had a complete understanding of their company’s financials.
• According to Inc. Magazine 69 percent of more than 300 execs and supervisors couldn’t pick the correct definition of “free cash flow.”

How can you expect to make informed decisions or pitch a new strategy or product if you are unable to articulate its potential revenue, costs, and return on investment?

Our leadership simulation assessment data tells us that leaders with high business acumen consistently show the importance of business acumen by:

• Thinking Through Solutions
  Leaders with high levels of business acumen carefully evaluate multiple solutions to a business problem based on clear criteria.  They brainstorm multiple solutions to problems, identify advantages and disadvantages of various solutions, and identify criteria to select the best solution.
• Understanding What Makes the Business Tick
  Leaders with high levels of business acumen demonstrate comprehension of the way business is conducted, including financial, marketing, and operational functions.  They readily grasp how the business works, correctly diagnose the current state of the organization, define business issues clearly and concretely, and make informed assumptions about unknown or ambiguous data.

Where to Start
To begin to intelligently discuss what impacts financial performance, think of your company’s financials simply as the way that you keep financial score.  The math is not difficult.  Begin by learning the terms; then you can graduate to interpreting and understanding the standard forms.

1. Learn the Fundamentals of Business
   Take a financial acumen training course, do online research, or invest in a textbook on the subject. The most important terms and concepts to understand are how to measure profitability, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), operating income, revenue, operating expenses, and  cash flow.
2. Study the Balance Sheet
   With term definitions in hand, analyze your company’s balance sheet. Become familiar with what a typical balance looks like and what it can tell you about the financial state of a business.
3. Learn How Your Company Measures Success
   Identify the critical few leading metrics and lagging key financial metrics that are most important to the performance of your team and your organization. Then understand the non-financial performance metrics that matter most and be able to compare quarterly results so that you know where your company is heading and where to focus.
4. Ask Yourself, “What If?”
   To understand how one metric affects another, understand some common scenarios. For example, what happens when revenue falls or expenses increase?  What impacts profitability the most?  The least?  Where does it make sense to invest?  What is the longer-term prognosis?
5. Ask an Expert
   As you accumulate knowledge, you’ll have questions. Find a mentor who is willing to help you learn.  A mentor can also advise on the consequences and risks of financial decisions that you need to make before you make them.

The Bottom Line
Whatever position you hold in your organization, the more you know about the finances, the more you can offer your team.  With better context, better decisions can be made.  If you want to improve decision-making and strategy execution, do not leave the numbers to the finance people.

To learn more about how to lift the performance of your team, download How to Fast Track Your Leaders with Just-in-Time Action Learning