Catherine’s eyes lit up when she saw her boss’s phone number flash across her screen: she would soon be basking in much-deserved praise. A sales director at a mid-sized manufacturing firm, she was feeling pretty good about herself. The sales plan was exceeding initial targets and this quarter’s performance was through the roof!
Rather than admiration, her boss expressed alarm: “Listen, I’m kind of concerned. I know sales are up but you’re generating a cash-flow problem. Accounts payable are 60 days, so accounts receivable should be at least 60, not 90 like the deals you’re closing.” She hung up, perplexed.
Meanwhile, across the hall, John from product marketing was having a hard time understanding one of the divisional finance directors. The PowerPoint had started off easy enough, but John was soon lost after a series of slides with multi-color charts and confusing acronyms like P&L, COGS, EBITDA, ROI…. As colleagues around the table followed along, he sunk down in his chair and decided his best course of action was to keep quiet and nod in agreement once in a while.
While economic concepts and financial acronyms may seem like Greek to the general population, for a senior manager – or a mid-level manager who aspires to become one – mastering the global language of finance and accounting is fundamental.
According to Prof. Javier Santomá of IESE’s Department of Financial Management, the first step is often a matter of overcoming a deep-seated fear of numbers. Once managers get past the intimidating jargon, they soon realize that accounting and financial concepts are straightforward tools that enable companies to measure their performance. Understanding them is vital for anyone who seeks to climb the corporate ranks or start their own business.
“A working knowledge of financial accounting fundamentals and the impact of financial policies on corporate accounts is critical for global managers, even if their day-to-day responsibilities don’t require it. The ability to analyze balance sheets and profit-and-loss statements, and integrate key metrics in their strategies will enable them to better frame their decisions and communicate with higher-ups in a language that is universally understood.”
A lack of fluency in the language of numbers is potentially career-limiting in the long run and anxiety-inducing in the short run. Consider Catherine, for instance: with a firmer grasp of operating cash flow, she would have realized that the 90-day collection policy would soon lead the firm to short-term liquidity crunch and the burden of extra financial costs, despite booming sales.
While building a solid financial and accounting base is important for corporate career progression, it is perhaps even more so for business owners and entrepreneurs.
As Prof. Santomá observed, “When companies start out, the CEO often assumes the dual role of CFO. Ultimately, the firm’s long-term sustainability will depend on how well the management team knows their numbers. You can’t diagnose a company’s financial health or help it grow and profit without understanding the basic tenets of finance and accounting.”
IESE’s focused program “Essential Finance and Accounting for Decision Making” gives managers a firmer grasp of basic economic concepts from a general-management perspective. Don’t miss the next edition starting on April 11!