Blog : Business Acumen

I was browsing the website About.com last week and came across a blog post titled Knowing How to Read an Income Statement. The author’s point of view is that managers owe it to themselves and to their employees to be able to read, interpret and explain income statements.

I agree, but I would like to take it further. I believe that companies owe it to themselves, their shareholders, their employees and their customers to make sure that managers – at all levels of the organization – have the business acumen required to make good decisions during tough times.

This is a subject near and dear to my heart, since Paradigm Learning has been helping companies build the business acumen of managers and employees since 1994. With economic problems escalating, business acumen has become more important than ever.

But what does it mean to have “business acumen”? Is it the same as being “financially literate”?

I don’t believe it is.

Someone who is financially literate would be able to “read” a company’s income statement and understand the terminology (revenue, cost of goods sold, gross margin, profit, etc.) and what the numbers represent (e.g., gross margin equals total sales/revenue less the cost of goods sold).

Being able to read financial statements is great, but financial reports only give the “score” of the game. They reflect what happened in the past.

Business acumen, on the other hand, is the understanding of how companies, departments, teams and people can play the game in order to impact the score. Someone with business acumen will understand how strategies, decisions and actions – at all levels - affect bottom-line profitability and cash flow and will be better able to contribute to changing these numbers in the future.

Companies that take the initiative to develop the business acumen of managers can benefit during tough economic times in five key ways:

• When managers better understand the financial and strategic reasons for new initiatives around products, processes or people, they’ll have a higher level of commitment to these important changes. And, as we all know, managerial commitment is key to the success of any change.

• Managers will be able to make more strategically aligned decisions at their divisional, departmental or team level – decisions that are less about “turf protection” and more about company success.

• Managers will be able to help their employees better understand company strategies, actions and initiatives – stemming the escalation of confusion, fear, sadness or anger that accompanies change or bad news.

• Managers and their teams are more likely to feel “engaged” and connected to the business when they “get” the numbers and when they better understand the actions and decisions of senior leadership. Engaged employees are more productive and more likely to accept accountability for their role in success.

• When managers and employees better understand where the company is going and have confidence in strategies and decisions, they will be less likely to look around for other job opportunities. Retention of talent is key to a company’s growth when the tough times are over.

Is your company taking steps to build the business acumen of managers in these tough times? Let us know your story.

You might also want to read our white paper "The Importance of Business Acumen Training for Managers and Employees."

In an article titled “Is Business Acumen a Substitute for Leadership?” on www.bestmanagementarticles.com, Bob Selden writes about how organizations are assessing which are more important leadership skills—management or business skills. He states that “in a robust study of actual behavior of managers within organizations, they found that in addition to cognition and interpersonal skills, business skills and in particular strategic skills actually became more important as a manager progressed through the organization.” (Study by Mumford, Campion and Morgenson and reported in The Leadership Quarterly, Vol. 18, No. 2, 2007.)

Our clients wrestle with this issue every day, and my experience working with them has taught me that in order for a company to succeed, it’s not an “either-or”. Leaders – and I believe that this means managers at all levels of an organization – need excellent people and process management skills as well as a high level of business acumen – the strategic understanding of the business and the ability to take actions in support of business goals. The combination of the two provides the powerful synergy required of managers in today’s complex business world.

I agree with Selden when he says, “Designers and providers of leadership and management development need to focus equally on the development of both strategic business skills and good leadership and management skills.” What are your thoughts on the subject or the article? Where do you think that business acumen fits into the leadership skill set of managers in organizations today?