Six Reasons Why L&D Needs Financial Acumen

Six Reasons Why L&D Needs Financial Acumen

As an ‘old-hand’ at consulting, I’ve been fortunate to work with a large number of L&D managers and team members, both in Australia and overseas. Along the way, I’ve personally experienced the significant benefits of financial know-how and I’ve seen many L&D clients and colleagues disadvantaged by their lack of it.

Stephen Covey put it succinctly when he said, “Just because a person is ‘in’ business doesn’t mean that person ‘gets’ business. (Cope 2018) This is especially true of many L&D professionals, who have a deep passion for and extensive skills in all things learning, but lack essential financial insight.

Not ‘getting’ the business isn’t limited to L&D professionals. Anyone who works in a non-financial support role runs the risk of being isolated from commercial aspects of business, especially if their speciality and interest subconsciously deflect them from learning about ‘boring finance’. I’ve lost count of how many people have said “I’m not a numbers person,” or “I’ve never been good at figures.”

According to Dictionary.com, ‘acumen’ is “keen insight; shrewdness.” Similarly, in the commercial world financial acumen is having a good understanding of business finance and being astute in applying it.

Here’s a very short assessment that you can use to start reviewing your financial knowledge: Can you explain the following?

  • Three basic rules of accrual accounting.
  • Multiple levels of profit in a business.
  • Two essential sources of ‘free funding’.
  • Components of the ‘cash to cash cycle’.
  • Measurement and effect of asset utilisation.
  • How a business can go bust showing a profit.
  • Core and swing factors influencing cash flow.
  • Key ‘levers’ for influencing financial performance.

Over the years I’ve spoken to many CEO’s and executive managers in commercial organisations about what they expect from L&D. Two related themes that stand out are:

  1. L&D needs a solid understanding of how the business makes money, and
  2. L&D must be able to demonstrate a clear contribution to financial success.

Keep in mind that financial acumen is fundamental to the broader concept of business acumen. In fact, according to Hendrik Ekelund of BTS (which has trained many leaders in business acumen), it consists of strategic thinking, financial acumen, and market orientation. (Ekelund, 2015)

From my experience, there are six reasons why L&D needs financial acumen, especially in these challenging times:

  1. Talk the Language of Money

Someone once said to me that “the language of business is the language of money”. It may be an exaggeration, but time and again I’ve experienced the benefits of understanding and being able to use financial jargon in business.

If you can talk the language of money it helps in at least three ways. (a) You can make sense of financial information and reports, (b) you can confidently communicate with financial people and executives, and (c) you can avoid misusing financial terminology (such as margins and retained profit), which loudly signals a deficiency in financial knowledge.

When talking to anyone with financial expertise, “you need to use words that indicate an understanding of the rationale for the financial side of life. So you need to use such terms and phrases as ‘cost effectiveness,’ ‘ROI,’ ‘added value,’ ‘measurable benefits,’ and ‘this contributes to the bottom-line’.” (Little, 2014)

  1. See the Big Picture 

One of the payoffs of financial acumen is that it enables you to understand the ‘big picture’ of business performance. By this I mean understanding (a) how the different moving parts of the business work together to create financial outcomes, and (b) the overall financial goals, priorities and metrics of the organisation.

In his book, Seeing the Big Picture, Kevin Cope makes the point that “if you want to be seen as a major contributor, show that you understand the relationships among the key drivers of your overall business—not just how your department works.” (Cope, 2018) Financial acumen enables one to look at the business from an ‘executive perspective’ and better appreciate their demands and decisions. A positive side-effect is feeling more ‘engaged’ and connected to the organisation as a whole.

  1. Understand Financial Consequences

When asked about desired results from financial acumen training, possibly the most common response I’ve received from line managers is that they want their people to understand the financial consequences of their actions.

As a L&D professional, if you don’t understand all the effects of your actions, you can easily make decisions that have detrimental commercial outcomes. In fact, research shows that the ‘failure costs’ associated with ineffective learning initiatives can significantly outweigh any benefits that are produced. And this doesn’t take into account damage to the credibility and reputation of those involved.

  1. Make Better Decisions 

This question puts it bluntly: “How can you make the best decisions for your company if you don’t speak the financial language and understand how your actions influence the company’s bottom line?” (Karen Berman & Joe Knight, 2007)

Charlie Munger (right-hand man of Warren Buffet) talks about the importance of having a ‘latticework of mental models’ in order to think smarter and make better decisions. Having a set of practical financial models in your head will give you a framework on which to hang experience and new learning. This, in turn, makes the knowledge easier to recall and apply. (Singh, 2016)

  1. Justify Learning Initiatives

Never forget that “managers assess a proposed initiative based on how well it can resolve business concerns and improve financial results.” [italics added] (Ajay Pangarkar & Teresa Kirkwood, 2014)

A lack of financial acumen makes it very difficult (if not impossible) to explain and justify learning initiatives from a financial perspective. It is necessary to ‘connect the dots’ between learning and the various financial outputs and metrics that are affected. Not an easy task if you don’t understand the interrelationship of financial variables and what exactly is being measured.

Financial acumen is also important to effective management of L&D as a responsibility centre. Think budgets, expense management and financial reporting!

  1. Enhance Career Prospects 

Simply put, lack of financial acumen is more than a weakness, it’s a liability! Learning about finance is a career-enhancing move and will enable you to more fully and visibly contribute to the financial success of your organisation. It will raise your profile and strengthen your personal brand.

If you’re keen to move into a managerial role, learning about the financial workings of the business will inevitably help you to move up. If you’re already in a team leader or manager position, developing your ‘financial smarts’ is essential. It will help to increase your confidence and effectiveness in your role.

Furthermore, financial acumen is an easily transferable skill. Your financial knowledge and skills will be valuable for the rest of your career. They will carry over as you progress and will be relevant no matter what you do in business.

In Conclusion 

The above six points make a strong argument for developing your financial acumen as a L&D professional, whether or not you are in a managerial role. I strongly encourage all L&D people to be proactive in learning the financial language and dynamics of business.

In order to be seen as key contributors who truly add value, L&D professionals need to have a good understanding of how business works from a financial perspective, their organisations’ financial priorities and KPIs, the financial consequences of their actions, and how to effectively enhance financial performance through learning-based initiatives.

Geoff Rip
Financial Acumen & Learning Experience Design

If you are interested in learning more about Geoff and his workshops on Essemy, please visit this link.

 

References 

Karen Berman & Joe Knight. Financial Intelligence Unlocks Career Growth, T+D Magazine, January 2007, p.72.

Kevin Cope. Seeing the Big Picture: Business Acumen to Build Your Credibility, Career, and Company. Kindle Edition, 2018. Foreword, p. vi.

Finance Fundamentals for L&D Professionals. Emerald Works, 2014. https://emeraldworks.com/resources/blog/tips-and-expertise/finance-fundamentals-for-ld-professionals

Ajay Pangarkar & Teresa Kirkwood. Five Competencies Management Expects Learning Professionals to Know. Association for Talent Development. 2014. https://www.td.org/newsletters/atd-links/five-competencies-management-expects- learning-professionals-to-know

Amar Singh. A Latticework of Mental Models. Medium, 18 April 2016. https://medium.com/@ummerr/a-latticework-of-mental-models-d88754da57d3