Creating Financial Acumen Essay Assignment Help
Creating Financial Acumen Within Your Company
One of the things that I believe so strongly, down to my deepest parts of my heart, is you have to create financial acumen throughout your company. I don’t care if you’re in finance, marketing, or human resources. You have to understand what makes money for the company.
I became a chief financial officer in 1995 for a sleepy Maine supermarket retailer. We were known to be very progressive with our people, and we’d let people try different things, and that was good. But one of the things that I discovered in my first couple of months of being there, is that the head of real estate was the person who also did all the analysis justifying the purchases of the different real estate locations.
I thought to myself “Well that’s interesting. It’s good that he’s doing that because he understands how to make money for the company, but what’s finance and accounting’s role?” I found out they didn’t have one, so I talked to the CEO. I said, “This is a little bit like letting the fox into the henhouse. You’ve got your real estate guy not only finding the sites, but justifying them and really, telling the world, this is what I think is going to make money for the company, and in eight years you might find out if it’s true or not.”
So within a few months, my finance people started analyzing the real estate investments, and we would spend about 500 million a year on real estate investments. This was not trivial. The first thing we found out is that the real estate folks didn’t have it right. They were combining the justification of purchasing the land with the financing decision, and anybody in finance will be the first to tell you, you have to separate those decisions. It was a good thing that we had become involved with the investment and financing decisions, because we also found a second problem.
What was being said in the assumptions and told to the board of directors, was one number; what was put in the annual budget was a much lower number. We were using sales figures to justify our investments and profit figures, and yet that’s not what our budget showed, and our bonus was paid on our budget. This didn’t make sense to me. If you’re going to say one thing to one group, the board, it should be consistent, and you should hang your hat on your numbers. You don’t just try and dress up, put lipstick on a pig to make it look better. You have to take your investment, believe it, and then deliver. Results are important.
That was an important lesson in financial acuity, that the real estate folks learned, and the operations folks learned – because they were the ones running the supermarket, they had to make the sales and profit figures that were in our investment analysis – and all of us, at the headquarters, had to learn that decision. We learned that the assumptions in the model that was used for our investment decisions were not correct, but I know their hearts were in the right places. I went to my business school, Kellogg, and I had an investment finance professor come out. I hired him for two days, to train 150 people how to make investment decisions. It’s not something you just are born with; these are skills that you can learn. By having this professor come and teach us capital investment theory, and walk us through a couple of cases, people started to learn – oh, that’s how depreciation hits my P&L, or that’s the kind of decision or assumption I have to make. I was just giving any number because I thought that’s what you wanted to hear.
So we had much more integrity in our number, as a result of this training. We made better decisions, and another key learning is, the more you can train people with financial acuity, you have ambassadors throughout your company. It’s marvelous to be able to talk to a real estate person or a technology person – somebody who says “I know what you’re talking about, Net Present Value. Okay, I even understand the concept. Now I know why you want me be so specific in my assumptions.”
It’s so empowering to talk the same language, and finance is the language of business. I don’t care what role you play in your company, your job is to help the company make money, and finance is the language that helps you communicate how you’re going to make money for the company.