Who’s spending the company’s money?

03 March 2016

Next time you are in the office, look around you.

Are you confident that most people in your organisation know how to spend the company’s money wisely? You should be. This isn’t just the responsibility of the CFO or the FD – everyone in the organisation from CEO down to the most junior staff needs to care. Why? Because every decision that gets made in an organisation affects its financial health – directly or indirectly. Even those who ‘don’t do numbers’ – if they are working on the company’s time, using its resources, they are doing numbers. And all those numbers all add up – just ask your CFO.

Most businesses – especially those in financial services – spend a huge amount of time and resource on ensuring that their people have the relevant qualifications and financial technical training for their role. However whilst many of their staff are financially educated to the correct technical level, they are quite often not financially literate.

Imagine if you could identify the people who are likely to make poor decisions before they do, exposing the risk they pose. The greater the financial implications (directly or indirectly) of the decisions they make, the greater that risk is. To understand how, the first step is to think beyond financial competence to financial literacy.

From financial competency to financial literacy and better company performance

The financial competence many demonstrated as students hasn’t always led to them becoming financially literate employees. Financial literacy is not about being able to identify the ‘right answer’ or explain key principles in an exam room; to be financially literate is to have both the competence and confidence to make the right decisions in the everyday context of the workplace.

What about the people who haven’t studied finance? The ones who ‘don’t do numbers’? Well we know that this adversely affects their personal finances. A 2015 study carried out by George Washington University of the retirement planning behaviour of 21,000 employees of the Federal Reserve, showed that more financially savvy employees participated more in the Federal Reserve’s retirement plan, contributed more of their salaries, and held more equity in their retirement accounts. Does an individual’s personal level of financial literacy hold implications for the businesses they work in? Yes, unless you believe that someone who is financially illiterate in the car park somehow becomes financially literate by the time they sit down at their desk.

Financial literacy is a leadership issue

Business leaders have long known the risks involved when they entrust their employees to spend the business’s money. They have sought to partition off ‘financial’ matters – finance becomes a matter for the finance department. Tight guidelines are issued as to who can spend, and on what.

For the rest – the ‘non-financial’ folk – there is an almost visceral reaction to sharing their company’s financials with them. A mindset that financial information should be distributed on a “need-to-know” basis still prevails in many quarters.

Opening the books

This is changing. The emergence of the “open book management” movement, which argues as Jack Stack does in The Great Game of Business, that companies should “open the books” to their employees and managers has been influential. And for a simple reason: employees and managers need financial data to make smart decisions.

“Without such information,” explained financial literacy consultants Karen Berman and Joe Knight in a 2012 Wall Street Journal article, “people can’t make good decisions in their daily work. Sales reps may be tempted to offer hefty discounts just when the company needs to boost gross margin. Engineers may keep proposing additional bells and whistles for the company’s latest products even though cash is tight. Plant managers, kept in the dark about warranty expense, may cut corners on quality in hopes of meeting production cost targets.”

Developing financial literacy

Opening the books is meaningless, of course, if employees don’t understand the numbers. In Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean, Berman and Knight suggest a framework for financial literacy education programmes built around four skill sets:

Understanding the foundation. Employees and managers must begin with the fundamentals: learning how to read an income statement, a balance sheet and a cash flow statement. They might learn, for example, something as fundamental as the difference between cash and profit.
Understanding the art. Although based on numbers finance and accounting is also an art. Not everything can be quantified. Rules, estimates and assumptions must be applied to the numbers to develop solutions and strategies. Employees and managers who understand this “artful” facet to finance are in a better position to perhaps challenge the numbers and uncover new solutions.
Understanding analysis. Financial intelligence includes understanding how to analyse the figures to answer important questions such as, “What is the return on investment in our company?”
Understanding the big picture. Financial intelligence, to use the authors’ term, doesn’t stop at the numbers. Financially intelligent people also understand how to interpret the numbers in the context of the big picture. They might compare sales figures to the competitive environment — noting, for example, that the entry of a start-up in a particular field correlates with declining sales in that field, indicating that the company must respond aggressively to the start-up. Changing customer needs or new technologies are other big-picture factors that might be incorporated into analysis of the figures.

Moving toward greater financial literacy

A steadily increasing number of companies are realizing the benefits of educating their employees about the financials of the company they work for. These companies range from New Belgium Brewing, whose philosophy was recently highlighted by President Obama at a White House event. Or consider global insurance broker Marsh, who in 2012 launched a mandatory finance education programme for its 25,000 employees.

However, mass financial education programmes are expensive – in time and money. So, this may not be the wisest way to spend the business’s money.

Who to train, in what and when are the questions that a business needs to answer if it is to target the training it offers more effectively and – ironically – spend its money more wisely. Why ‘sheep dip’ a hundred people through a generic finance programme, when you could target focused development on a handful of key individuals whose role and responsibly demands a level of financial literacy in say managing cash flow or budgets and forecasting and these are where you’ve identified that their current literacy level is dangerously low

This is the purpose of the Kaplan Diagnostics – Financial Literacy – a tool that allows you to assess and report on the levels of financial literacy in any organisation at any level. The tool presents a series of workplace scenarios (tailored to the organisation) and a series of questions that flow from it, and poses the respondents two key questions: do you know the answer? How confident are you that you know the answer?

These two simple questions, a few complex algorithms and a great deal of expert written content, allow Kaplan to give any organisation a clear picture of who in their organisation is likely to be spending its money well and who is a risk. And the greater the financial implications of the decisions they make, the greater the risk they pose.

Next time you are in the office, you can look around you and guess, or you can run the Kaplan Diagnostics assessment and know for sure.

Learn more about Kaplan Leadership & Professional Development.

Dr Ian Stewart, Head of Leadership and Organisational Practice, has over 25 years’ experience of leadership development in the public and private sector. Prior to joining Kaplan, Ian ran the Behavioural Science department at the Royal Military Academy, Sandhurst.