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Financial Advice for Non-Financial People from Professor Peter Wilson
January 15, 2013
Some people are naturally born math whizzes. For others, it is a completely different reality. Yet many who are challenged by numbers still have responsibilities related to financial analysis and portfolio optimization.
Peter Wilson, a professor at Babson College and formerly the Executive Director of Executive MBA Programs at Fuqua, believes that many "non-financial" people don't fully comprehend the financial consequences of their decisions. Wilson, the faculty member who will be teaching Fuqua's Finance for Non-Financial Managers program in Dubai from February 17-19, offered some tips in a Fuqua Q and A.
What tips would you give to a manager trying to determine the financial health of his/her company?
First, you need to know your firm's current strategic positioning as well as its short-term and long-term goals. It is only within this context that you can properly interpret key performance measures such as revenue growth, operating margin, and cash flow. Second, don't focus solely on the income statements and profitability ratios. A firm can save (or waste) large amounts of cash by carefully managing its assets and, in particular, its key working capital accounts (receivables, inventories, and payables). Finally, pay attention to how the assets of the firm are being financed. While relying heavily on debt-financing can reduce a firm's overall cost of capital, it can also lead to high liquidity risk which can jeopardize a firm's ability to continue in business.
What are the keys to strategic execution?
While it may seem obvious, there must be agreement throughout the firm on its mission and strategic goals. You must first know "where you want to go" before you can determine the best way to get there. Effective strategic execution then depends on being explicit with these hypotheses to determine actions that will enable your firm to achieve its goals. These hypotheses determine the business model the firm will employ and should include a financial strategy (how will the firm generate revenue, profits and cash flow); a customer strategy (what is the customer value proposition being offered and how are we differentiated from the competition); and an infrastructure strategy (what investments must be made in hardware, software, equipment, people, etc, to enable execution of each strategy)? For each of these individual strategies, or strategic initiatives, key performance measures must be identified that link operational actions to each initiative and each initiative to the goals and mission of the firm. Only with a system of integrated goals, initiatives and performance metrics can a manager implement, monitor and revise its strategy.
What are some of the issues you see in how "non-financial" people evaluate financial decisions?
The biggest issue is that these people often don't truly understand the financial consequences of their decisions on the performance and value of the firm. I believe that a good manager should be able to answer three questions every time they make a significant strategic or operational decision in their work:
1. How will this decision impact how my firm looks to investors; what is the impact on the income statement - profits and losses?
2. How will this decision impact cash flow? (Profit/loss impact is not always the same as the impact on cash flow).
3. How will this decision impact the value of the company?
How can "non-financial" people improve their financial decisions?
They must first learn the language of finance. An understanding of the basic terms and concepts is essential to being able to make better financial decisions. Then, managers must use what they have learned by "joining the conversation" with their finance colleagues to better understand the financial consequences of their day-to-day operational decisions. Only then will managers begin to see the financial dimension of their decisions and be able to make finance part of their managerial toolkit.
What are some of the unique attributes of Fuqua's Finance for Non-Financial Managers program?
First, we remove the "fear factor" from finance and make it easy to understand and fun to learn. We look at finance within the context of everyday decisions so the measures become obvious and their interpretation clear. Every term, concept, and tool is introduced and explained as a natural element of common business practices, thereby taking the mystery out of finance. This enables our participants to become confident in their financial acumen, which allows them to fully participate in financial decisions in their workplace.