In order to make smart decisions affecting the organization’s cash and resources, all managers must understand basic business acumen concepts. Lacking some or all of this knowledge can create barriers in a leader’s decision-making process, including – but not limited to – creating budgets, forecasting, and even managing costs.
Below is a shortlist of five business acumen concepts that every manager should know:
1. Basic financial literacy
Basic financial literacy is the ability to interpret financial statements and extrapolate the story behind the numbers (at a high level). This allows managers to translate and retell that story to their direct reports - providing context for the organization’s financial objectives to those that aren’t as business savvy.
2. Money, money, money
There is a huge difference between cash, profit (gross profit, operating profit, net profit), and revenue. Using these terms interchangeably (or simply referring to them all as “money”) can muddy the business acumen waters and further complicate someone’s path to financial literacy.
Cash – Refers to money available in cash, money on deposit in banks and any items availed for immediate deposit. Those items might include checks, money orders, charge slips, etc. Also called “liquid funds.”
Revenue – The inflow of cash or other assets received in exchange for goods or services provided to customers; also called “sales.”
Three Types of Profit
Gross Profit – Sometimes called “gross margin” or “gross profit,” and calculated as net sales minus cost of goods sold.
Operating Profit – The difference between sales/revenue and operating costs. Also known as “operating income.” You might also hear this called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Many organizations track EBITDA closely because it is a profit number we can most affect through our actions as managers (driving efficiencies, keeping operating costs closely managed, etc.).
Net Profit – The amount remaining after deducting all costs (including taxes and interest) from all income. Losses are indicated in parentheses on financial statements.
3. Profit Margin
You might hear profit or margin or profit margin – they all refer to the same thing: how much money is the company keeping after all expenses are paid out. The difference between profit and margin is that profit is expressed as a number and margin is expressed as a percentage. The same profit list above corresponds to the margin list below – again, the margin is just the percentage version. Being able to calculate and understand the story told by these formulas gives managers deeper insight into the health of their organization.
Gross Profit Margin = Gross Profit ÷ Net Sales
Operating Margin = Operating Income ÷ Net Sales (this can also be called EBITDA Margin)
Net Profit Margin = Net Profit ÷ Net Sales (this can also be called Return on Sales (ROS))
4. Unbudgeted Expenses
The impact (on margin) of an unbudgeted expense cannot be overstated. To most, the amount of revenue needed to offset even a relatively “small” expenditure comes as a shock.
Here’s some simple math (yay!):
Imagine that an organization has a ROS of 10% on $1,000,000 in sales. This means they keep 10 cents for every dollar sold.
Now let’s say they have to spend $4,000 on a new computer. How much would the company have to sell to make up for this expense?
$4,000 (expense) ÷ 10% (ROS) = $40,000
As you can see, even a relatively small expense can require a lot of additional revenue to offset. And in today’s competitive business world, slimmer profit margins require even more sales to cover these expenditures.
5. Financial Levers
Armed with business acumen, managers can use the financial levers they pull to increase top-line revenue, manage costs, maintain or improve bottom-line profit, allocate resources wisely, and maximize the use of assets.
With comprehensive business acumen training, your managers can gain the financial literacy that is necessary to make a meaningful impact.
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