In the complex landscape of business leadership, mastery of fundamental financial concepts is no longer a luxury reserved for the Chief Financial Officer—it has become a crucial necessity for leaders across all strata of an organization.
Finance is an integral aspect of business strategy and success, regardless of one’s role in an ... [+]
According to research published by Harvard Business Review, finance can seem intimidating, especially for those not naturally inclined to it. This is because finance is like a language that requires time and practice to learn and become skilled in. So, how do you develop the financial acumen that is necessary to lead in today’s world?
The good news is that mastering the basics doesn’t require a degree in accounting or economics: anyone can learn the fundamentals of financial concepts, and it’s relatively easy to do.
Demystifying jargon is the first—and perhaps most important—step. That’s because once you can understand and communicate the language of finance, it becomes much easier to make effective, strategic decisions that will improve the financial health of your organization. Start by familiarizing yourself with terms like “assets”, “liabilities”, and “equity”—the backbone of financial statements. Understand that an asset is anything owned by the organization with value, a liability is any debt owed to creditors, and equity represents the residual value of assets after all liabilities are paid.
“Knowing the difference between cash held that is an asset and cash held that is a liability can save regulated businesses millions in fines. For example, client money held by an investment business is actually a liability as it is still owed to the client,” said Asare Nicholls, author of The Client Money and Assets Blueprint, in an interview.
Next, start reading three financial documents: the balance sheet, income statement, and cash flow statement. These documents provide a detailed picture of any company’s financial position by showing its assets and liabilities, income and expenses, and cash received and spent.
“Maintaining positive cashflow is my responsibility as CEO, but as I remind my teams, everyone has a part to play in this, be it in a revenue-generating or a cost-minimizing sense,” said Yaniv Bertele, CEO of Vesttoo—an AI-powered insurance-linked securities platform—in an interview. But, he added, “It’s impossible to make the right calls without paying attention to the data and the trends financial statements reveal.” This view is interesting because it confirms that understanding how to read financial statements isn’t just for accountants or CFOs: everyone in the organization should learn how.
Bertele concluded, “It’s impossible to be a well-rounded executive today without a willingness and ability to deep dive into financial statements, regardless of whether you are leading a startup through its first funding rounds, scaling an SME into a global operation, or running a large, diversified group.”
Bertele, who successfully raised $80 million for Vesttoo in its Series C funding round last year, makes an interesting point. It’s echoed by Vijay Pereira and Amir Shoham, professors at France’s NEOMA Business School and the Fox School of Business at Temple University, respectively—both of whom advocate the importance of financial literacy among executives.
In an interview, the scholars said, “Financial decision-making is based on a few straightforward fundamentals that help us make strategic choices that will result in a higher probability of being in a better position in the future.” When asked why financial literacy is becoming increasingly essential, they responded, “Because finance deals with the profitability of investment now based on future profits, it needs to capture all future cash flows and risks, which means that finance is present in all activities of the organization.”
The professors added, “A finance lens helps firms like startups to understand what tasks, products, or activities are too risky that threaten the ability of the company to raise capital due to the risk premium that results in a higher cost of capital.”
“The art of leadership, to my mind,” said Bertele, “can largely be boiled down to making a small number of high-quality decisions, all of which must be oriented towards steering cash flow in the right direction. By making it part of my regular duties as an executive to take the time to digest the latest financial data, I aim to make the data the essential context to every strategic choice I make.”
In the end, therefore, finance is not merely a domain for CFOs, but a language all business leaders should speak fluently: The better one knows the language of finance, the more likely one is to understand the overall context and implications of their decisions. From a leadership perspective, this could mean the difference between success and failure or even the difference between staying ahead of the competition or being left behind.
Evidently, the world of finance is not as daunting as it may initially appear. That said, it is an integral aspect of business strategy and success, regardless of one’s role in an organization. So, whether you’re leading a startup through its initial stages, scaling a small enterprise into a global operation, or directing a large, diversified group, a solid foundation in financial principles is an invaluable asset.
