Our experience over the years has shown us that the vast majority of managers and leaders in Fortune 1000 companies have deficiencies in their basic financial knowledge. We spend most of our time teaching managers and leaders in corporate America how to read their own financial statements, understand key financial measures, and use financial tools to understand the data.
Last year we developed a simple financial literacy test, in part because executives almost always assume their managers and leaders know more about finance than they really do, and in part because it’s a great tool to assess people’s knowledge before we develop a custom training program for them.
To better understand the financial intelligence landscape, we recently commissioned a national study of managers at U.S. businesses with at least 150 employees. The average score on our test from the sample group was a paltry 38 percent.
We were not surprised by the test results. Frankly, finance and accounting professionals don’t do a very good job of explaining the numbers. They are good at generating reports and information but too often wrongly assume that people know what the numbers really mean.
Recently, Joe was meeting with the COO of a multi-billion dollar public company. The COO said, “Joe, I read your book Financial Intelligence and I really enjoyed it. It was straightforward and really got at the basics. I think for my mid-level managers this material would be great to put into a course. On the other hand, for my direct reports this stuff is too basic.”
Joe told this executive that he was assuming too much and that he was confident that even the COO’s executive vice presidents needed to review the fundamentals. This COO asked us prepare a pilot course on basic financial concepts for his direct reports to see if it hit the mark.
The first topic of the morning was on the income statement. As Joe went over the statement and discussed how to use the information, the questions started coming. At one point during the EBITDA discussion one of the attendees asked what the number really meant and why it was so important.
Joe could see the COO about fall out of his chair in the back of the room. It turns out that this team was working on an acquisition of a smaller private company and much of the negotiations involved EBITDA (many small businesses are priced based on a multiple of EBITDA).
This experience was not unique among our clients. When highly successful employees are promoted to positions of management and leadership, it is assumed that they suddenly understand the financial information provided to them.
We believe that improving the financial intelligence of business managers and leaders is critical to their success, both personally and professionally, and to their companies’ success. Improving financial literacy ensures that everyone understands how financial success is measured and how they make an impact, helping to achieve long-term financial health in good times and helping to weather the economic and strategic storms in bad times. We hope, too, that it will lower the probability of financial fraud. (Virtually every fraud case is discovered by a financially savvy employee.)
We encourage you to find ways to increase the financial intelligence level in your organization. The Financial IQ quiz is a quick way to assess where you stand now.
For more, see the Forethought we wrote for this month’s issue of Harvard Business Review: “Are Your People Financially Literate?”
Originally published on Harvard Business Review Blog.