Leaders Score a Failing Grade on Finance

We’ve asked this question before – “how much do you really know about the finances of your company?” Logic would dictate that leaders should have a pretty firm grasp on the basic financial metrics, yes? Not so, according to a study conducted by Karen Berman and Joe Knight, principals at the Business Literacy Institute and the authors (w/ John Case) of Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean (Harvard Business Press, 2006).

In one study, the authors gave a basic financial literacy test to 300 U.S. managers (C-level to supervisors), who scored a rather alarming 38% on average (an “F” in anyone’s book!). A majority of the leaders were unable to distinguish profit from cash, many didn’t know the difference between an income statement and a balance sheet, and most (70%) couldn’t identify the correct definition of “free cash flow.” The authors also tell other financial horror stories such as having to help a sales force understand the different between making a sale and making a profitable sale – nearly two-thirds thought that discounts offered by sales reps had no effect on gross margin.

Is this troubling? You bet it is… if you don’t know what goes into making the numbers, how can you improve them? How can you help your company determine a course of action if you don’t know what’s happening? There’s a reason that most leaders don’t speak “finance” – it’s because they can’t. Are you one of those leaders? Do you know your way around the numbers – even the most basic ones?

If you don’t, but you’d like to – check out this website for a little self-education: www.financedog.com – there’s a free quiz that will get you started. Good luck – I hope you’ll soon be joining the business conversation at your company!