Savvy: shrewdness and practical knowledge; the ability to make good judgements
Having financial savvy will help managers to:
- balance short-term profitability with long-term value creation. (For instance, cutting the training budget will most likely improve this year’s profitability and cash flow. But how can you show that it will harm future performance? Not anecdotally, but in a way that the finance director will accept?)
- build robust business cases and justify investment decisions – for equipment, marketing, new staff, training …
- recognise the critical importance of cash flow and working capital
- understand the real performance drivers in the business – many of which don’t appear in the financial statements, such as relationships, culture, skills and knowledge
- undertake what-if analysis to better understand risk
- manage resources more effectively
- react more quickly to the unexpected
- develop and manage budgets
- know how to evaluate opportunities and when necessary cut the right costs
The challenge for managers is to make the link between the decisions they make and the organisation’s financial results. Our courses can help to remove the question marks.
Companies need a new approach to finance if they are to compete successfully and grow the value of the business in real, rather than accounting, terms. Our courses get behind the numbers and uncover their real meaning. Common themes are:
- value management
The traditional financial statements and ratios were fine during the ‘industrial age’; nowadays they can give a very misleading picture. For instance, on average, 75% of the value of a company does not appear on the balance sheet. The real value in a company lies not in its balance sheet assets but in the skills of its people, its accumulated R&D knowledge, relationships, brand, systems. Managers must fully understand the concept of ‘value’ if they are to make sense of ‘finance’.
- performance drivers
“The point is simple: if you want to know what your future cash flow will look like, investigate where it comes from – the market … research shows that companies that look to the sources of cash flow – those that think about the market – are more profitable.”
Tim Ambler Many KFIs (Key Financial Indicators consist of accounting ratios. They are based on historical data and are a crude indicator of future performance. In addition, they track ‘symptoms’ not ’causes’. To illustrate: a reduction in profit margin tells you that you are making less on each sale but it does not tell you why. However, analysing ‘performance drivers’ – for example, how many visits made by a salesman – will point towards ’causes’. This is the approach of the Balanced Scorecard and this balanced perspective is a recurring theme of our programmes.
- what-if models
Typically in our finance courses, participants will build, from a blank spreadsheet, a sophisticated what-if model that reveals the impact of real world inputs, such as customers taking longer to pay, on the financial statements – profit and loss, cashflow and the balance sheet. As we progress through the course, each new aspect is considered in the context of the model, thus helping delegates to ‘fit the pieces together’.
We emphasise that the numbers are only representations of a much more complex reality. As an example, a revenue forecast should not be simply last year plus 10%, it should be constructed from a deeper analysis of the factors that influence customer buying behaviour.
- practical tools
The primary objective of our courses is not to turn managers into poor accountants; it is to develop financial savvy: to give managers a balanced financial perspective and a set of practical tools that they can use to generate sustainable success.