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Financial Awareness Drives Shareholder Value

Module by: Paul Taylor. E-mail the author

Summary: To generate shareholder value, managers need financial knowledge. This means that managers need to look beyond the profit and loss and balance sheet and see how to develop a case for investing in intangibles such as brand, relationships, skills and culture. These are primary drivers of success over the longer term even though they are absent from the conventional financial statements.

Many managers are operating in a financial vacuum. They recognize that they will be measured on the financial results of the company and yet they don’t genuinely comprehend the relationship between the things they do everyday and the financial statements. Managers need not become accountants. Nevertheless, there is certainly a level of awareness that will improve their decisions and the overall business performance. Finance for managers embraces an awareness of the the true drivers of financial performance. For example:

  • what will the effect on budgets be of competitor moves, changes in supplier terms, changes in the economy.
  • how can training be justified
  • what are the cost implications of a business plan based on closing a branch office
  • how will profits be affected by investment in new plant

The Numbers Can Deceive

Financial understanding for managers needs to extend beyond the basic financial statements. To begin with, the profit and loss and balance sheet are from the past. Operating your business according to last year’s figures is like looking backwards as you walk. Of greater importance is the fact that today it is intangibles that drive results – skills, brand, relationships and knowledge. These crucial assets don't get a mention in the financial statements even though in most organizations they constitute most of the value: Finance for managers should mirror the real world.

New Perspectives on Financial Awareness for Managers

Managers need to look further than accounting profits. Thus they need to understand concepts such as:

  • shareholder value management – this means looking beyond the next quarter. Investors are interested in their gain over a period of years, not this month. With a knowledge of shareholder value, managers can justify investing in culture, brand or relationships even when this means a reduction in short-term profits.
  • performance drivers – common financial measurements track effects not “causes”. To illustrate: a lowering of contribution margin tells you that you are making less on each sale but it does not tell you why. However, analysing critical success factors – for example, how many visits made by a salesman – will point towards “causes”. This is the approach of the “Balanced Scorecard”. Finance for managers needs to bring together non-quantitative drivers and financial performance. Academic research confirms that managers that are able to do this deliver substantially higher returns on investment over a longer-term than those that do not.
  • "what-if" models – managers must recognize the comparative impact of actual inputs, such as an increase in the average time it takes for customers to pay or reducing the number of sales people. That means that they need to have responses to the “what-if” questions.

Finance for Managers Training

Far too many Finance for managers training focuses on analysing financial statements. The ability to calculate fifteen different ratios does not provide real perspective. The optimum means to acquire this insight is for managers to create a business model with inputs – margins, response rates on marketing activities, the time it takes customers to pay – and outputs – the financial statements. Managers can then alter the inputs to mirror the type of actions they take on a daily basis and instantly see the results.

Financial understanding for managers courses should not aspire to turn managers into accountants; courses should provide managers with balanced financial perspective and practical tools that they can utilize to to generate real growth.

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