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With Tax Day in the US as a backdrop, we’re going to focus on why it’s so important to develop your financial skills, even if you don’t work in the Finance function of your company.
At the risk of stating the obvious, businesses exist to make money for their owners, whether they’re a mom-and-pop retail business or a large publicly held company. Yes, businesses have other purposes as well – such as to provide employment, to deliver needed products and services, and to offer social good – but they are profit-focused at their core.
Despite the foundational role that financials play in business, I’ve been surprised by how many people with whom I’ve worked over the years don’t understand key financial topics such as:
- The role of financial statements, like the profit and loss (P&L) and balance sheet
- The concepts of revenues (or turnover), expenses, assets, and liabilities
- The difference between fixed and variable costs
- The notion of profit margin (which, admittedly, can include / exclude different components, making it important to understand the specifics)
- Why some costs are expensed in the current year and others are capitalized (i.e., expensed over a period in the future)
- How to develop a financial case to request funding, such as for a project you're leading
- The financing of a business, through shares (what most of us know as stock) and lending (which could take the form of bonds), and the risks involved in each
- The difference between a public company (whose shares are traded on an exchange like the New York Stock Exchange) and a private company (whose shares aren’t traded on an exchange)
- The types of taxes that your business pays, and how they can influence factors like where your company is incorporated (legally registered) and where it operates
- Why a business might go bankrupt
This is undoubtedly an incomplete listing, but it represents many of the core areas of finance that come up in most businesses.
To be fair, whole academic degrees can be focused on Finance and Accounting, and whole careers can be spent specializing in these areas. But even if you’re not a “finance person”, you still need to develop your financial acumen, so you’re familiar with:
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How your business has been financed or backed. This is especially important if you’re working for a start-up, venture-backed, or private equity-owned company. It’s really especially important if part of your compensation will include shares or options and not just a salary
- The health of your company’s financials, such as its overall profit margins, revenue growth, debt levels, and cash on hand
- What contributes to your company’s revenues, i.e., its most important products and services, and how much money it makes each time it sells one of those products or services
- How funding decisions are made, such as for hiring or project approvals
So, how can you develop your financial acumen without going back to school full-time? Here are a few suggestions:
- Make friends with a “finance person”, whether they’re in Finance or not. You’ll find that most of them love to “geek out” on Finance and will be willing to help you learn the basics. Have them walk you through the company's financial statements, so you develop an understanding of them
- Ask your manager, mentor, or others in the know what products or services are most important to your company and how much money is made when they’re sold to your company’s customers
- Ask finance-related questions like "How much do we expect to grow this year?" or "How do you feel about our profit margins?" in Town Halls and in other interactions with the senior people in your company
If you work for a public company, you can also:
- Listen to your company’s quarterly earnings presentations, which are open to anyone
- Read other documents your company presents to investors. Many companies hold “Investor Days” or “Analyst Conferences”, in which they’ll go through these materials, and they’ll be available on your company’s website
- Review your company’s financial statements, though these get technical pretty quickly so start just by working to understand the high points – revenues, revenue growth, expenses, and profit margin
You’ll find that being finance-savvy can help you in a variety of ways in your career. It’s relevant if you’re an individual contributor, important if you’re a first-level manager, and essential if you’re more senior than that, where lacking finance knowledge can be a career limiter.
How have you developed your financial skills during your career? We’d love to hear your feedback on what you do specifically. Feel free to share your thoughts by writing to us at info@pathwise.io. We’ll then share a summary with the broader member group.
JR Lowry and the PathWise team
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