Recently, I listened to economist Austan Goolsbee give a short explanation of the importance of financial literacy in the era of populism and the seemingly renewed interest in the positive aspects of socialism. He was speaking on a morning financial news show on CNBC. A short while later, I read an article that summarized the thinking of JPMorgan Chase CEO Jamie Dimon on this subject, as stated in a letter to shareholders. In it, he slams socialism and defends capitalism, arguing that while capitalism does have its flaws, there is "no question that capitalism has been the most successful economic system the world has ever seen." This, and the ongoing “tug of war” between MSNBC and FOX News got me thinking about the role a coach could play in helping companies improve the financial literacy of their first- and second-line managers and the impact this could have.
It is likely that senior managers reading this are already thinking, “It's not possible that my first- and second-line managers lack a basic understanding of the language of business, i.e., finance.” Well, I am here to tell you that many do lack it. In fact, it is my experience that most have only a rudimentary understanding of the role financial decision making plays in their day-to-day operational lives. I assert that this failure is costing their company money and lots of it.
While it seems obvious to me, one might ask the question: “Why is financial literacy at the lower levels of management even a need?” The short answer is that without an understanding of basic financial metrics, managers will not be as effective as they otherwise could be.
A couple of cases in point:
• In one situation I worked in, only the senior manager knew the total cost of spilled product when taken to the sales line. When the other managers learned the true cost, waste became a priority for everyone.
• Several coached managers I worked with did not know how to calculate how quickly money doubled based on the rate of interest applied (the “Rule of 72”). When explained, they weren’t sure why it was important that they understand this function. I had to explain that this was a key element in establishing a “hurdle rate” for investment by the company. (Don’t get me started on “hurdle rates!”)
Other examples abound.
So how does a financially literate coach help in this situation? By working with new and first- and second-line managers, the coach can point out the financial implications of decisions made by these managers and company leadership.
Many, even junior, managers today are responsible for significant amounts of money in the form of inventory, plants and equipment, software, etc. Managing these assets with an eye toward the financial impact of getting it right can result in substantial revenue falling to the bottom line. The right decision on an issue like preventative maintenance could save thousands in repair and replacement of vital equipment, not to mention lost productivity.
How are managers, unaware of the concept of “return on investment,” supposed to consider this in their decision making when it comes to taking an otherwise functioning machine offline for maintenance? Moreover, the opposite concern may be the right one. It is possible that the right decision would be to allow the machine or software to continue to function until failure or new software is implemented and debugged, however inefficient the older software. This would be the case, for instance, in an environment where the conservation of capital through the avoidance of expense on obsolete equipment was the right decision.
A first start would be to send all first- and second-line managers to a “Finance for Non-Financial Managers” course at a local college/university or offer such online and make it mandatory. Unfortunately, however, this may not cut it. Practical application of what is taught in these courses is required. Here is where the coach could come in. Fortunately, the long-term remedy is both inexpensive and highly effective. A financially literate coach could work with your management team at the entry- and first- and second-line level in both the areas of finance and management. The multiplier effect of this action on the bottom line would be both quick and substantial.
Financially literate managers would have the tools to make informed judgments regarding the true cost of their decisions. Moreover, they would now “get” the decisions of executive leadership and, thus, be more likely to work to implement them. First- and second-line managers are also great influencers of the direct labor force, another multiplier.
Companies need financially educated leaders at all levels if they are going to make valid decisions that are understood by those charged with their implementation. The role of first- and mid-level managers in this regard cannot be overstated.
