You’d probably figure that when a person reached a certain level in management, that person would have some basic business knowledge. You’d probably be wrong.
Business owners routinely expect their managers and supervisors to have an understanding of the basics of business, especially money and finances. A survey by the Harvard Business Review shows that owners’ expectation might be too high.
Asked to take a basic financial-literacy exam, a representative sample of 300 managers — from C-level executives to supervisors — scored an average of only 38%. Get this: Over half didn’t know the difference between “profit” and “cash.” Many didn’t know the difference between an income statement and a balance sheet. Nearly two-thirds thought that discounts offered by sales reps had no effect on gross margin.
Does it matter? When delivering the results of the test, Harvard presented scenarios in which that lack of knowledge could cripple a business. For instance, imagine an inventory manager who doesn’t understand the relationship between inventory on hand and cash flow.
Here are three sample questions from the test (answers at the bottom):
1. You should be pleased about your company’s financial results if –
a. There is a negative trend in operating margin.
b. There is an increasing trend in COGS.
c. Cash flow is coming from company investing.
d. Cash flow is coming from company operations.
2. A company has more cash today when –
a. All customers pay their bills sooner.
b. Accounts receivable increases.
c. Profit increases.
d. Retained earnings increases.
3. To investors and analysts, free cash flow is a key number because –
a. It reflects the cash that is “free” — that is, your company doesn’t have to pay interest on it.
b. It is the cash that can be used to pay shareholders their dividends.
c. It reflects the operating cash that has flowed into the business that year.
d. It is the cash that investors put into the business.
Answers:
1. d.
2. a.
3. b.
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Tags: cash flow, Harvard Business Review
December 3rd, 2009 at 4:58 pm
Wow – thank you for sharing the results of the Harvard survey. Unfortunately, the results don’t surprise me. To share a quick story, I once worked for a Fortune 100 company and as soon as I got there, I asked which products were the most profitable. I was in Consumer Insights and I always liked to know this so that as we did research, we could look for ways to sell more of the most profitable products/services. Surprisingly, my boss didn’t know; His boss didn’t know, and no one could point me to the people/person who did know how much profit each product contributed.
Most of us learn about corporate financials in college or grad school, but unless they work in accounting or operations, few have to deal with the numbers in their positions. Companies could do a better job of educating both upper – mid level management on how the financials are affected by each divisions’ business, etc. to bring it to life for and make it relevant to each employees’ role. Let’s hope for a more educated future!
December 3rd, 2009 at 5:26 pm
These are the products of government schools. What is the percentage of college student who have to take remedial reading and writing courses just to keep up? It’s the dumbing down of America – all at the hands of the teachers unions who worry more about job security than performance of the students.
December 3rd, 2009 at 5:32 pm
@ LEU: I don’t think reading skills are the issue here, but rather a lack of understanding of accounting terms and processes.
December 3rd, 2009 at 6:25 pm
this doesn’t surprise me and I beleive the same can be said for most senior managers thay they know even less about information technology and what it can and will do for their companies if implemented wisely
December 3rd, 2009 at 6:31 pm
Of course it is the product of gummint schools. It couldn’t conceivably be the product of parents who have no regard for schools or would rather complain about a teacher’s shortcomings rather than examine their own. Nor would it be the product of a business climate that may not reward knowing these things but hope that, if needed, they will spring, like Athena, fully formed from the head of Zeus.
Fifty years of business experience tells me people learn what they think they need to do their jobs. If they don’t have any reason to know about “free cash flow” it may be better for them AND for their employer, they look at concepts like the “sales funnel.”
The lady first commenting is quite correct. When a company values knowledge of these concepts sufficiently to make them relevant to an employee, they will get learned.
December 3rd, 2009 at 11:53 pm
The reality is that, like with most things, there are only a few that really understand how things work. In large businesses, people have to be specialized for their roles; in small businesses, people don’t have to be expert at all aspects.
The bad news in all this: there’s a huge amount of theoretical productivity and efficiency that will never be realized because of human nature and the complexity of life.
The good news in all this: (1) if you do understand the parts of your business that are the key drivers, that’s a real competitive advantage (even if it seems like “only the basics”), and (2) there are opportunities for consultants and clients to realize substantial value by working together to bring the consultant’s specialized knowledge into the business.
December 4th, 2009 at 8:23 am
I agree with LEU, No one learns anything useful in school anymore. Kids can’t even add much less figure out cash flow and operations. Everything is computers, and that although good in many ways, doesn’t teach anyone to think.
December 4th, 2009 at 10:02 am
LEU,
It always amazes me that our “public” schools have let us down for so many years! Hmm, wonder where 90% of all the technology has come from over the last 40 years? Do you think ALL the innovators went to PRIVATE school? I guess every leader in industry is from a private school? What an absurd generalization. I am in my 50′s and remember these same comments being made in the 70′s. I guess my public school-educated generation haven’t acomplished anything in the last 30 years!
December 4th, 2009 at 10:41 am
What more can really be said about their lack of education and true knowledge ? (A) they’ve never run a lemonade stand as a kid…but look at Obama, neither has he ! (B) they’ve never sold anything door-to-door; (C) they’ve never worked where performance and merit were rewarded…or witheld upon failure.(D) they are products of anti-business,anti-capitalism,socialists in the classrooms.
Chances are they couldn’t actually make change from a cash register. The imbeciles NEVER had the basics….and(wait for it) it’s getting worse and there are millions of these over-educated eggheads ready to muck-up the system even morso !
December 4th, 2009 at 10:41 am
And the horse you rode in on !
December 10th, 2009 at 11:16 am
In our world there are those who fly the planes and those who ride the plane. Can’t blame the riders if they can’t fly, that’s the pilots’ job. Will you notice that air planes are not falling everyday because the riders don’t know how to pilot, and business aren’t failing everyday because managers don’t know all the ends and outs of running the business. A report like this should only encourage those who may have a like of business skills to apply for those kinds of jobs. I would venture to guess that a lot of managers in those positions may be there because of their integrity and work ethics, and not so much their business knowledge.