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Any questions? Plugging the gaps in financial knowledge

Finance often has a problem with lack of financial literacy among its management colleagues. Below Phil Ingle explains just how widespread that lack of finance knowledge tends to be, and sets out 10 simple strategies for addressing the problem.

Picture the scene. It’s a meeting of a business organisation and the finance director is called upon to brief the rest of the team on the latest financial information. With the presentation complete, he or she asks for questions. There are none, just the audience’s palpable sense of relief that it can move on to the next topic.

Why the lack of questions for the FD, let alone financial questions from the FD?

An article from Harvard Business Review gives a clue.1 In a survey of over 300 US business people, a majority showed a woeful lack of financial knowledge. Over half could not define the difference between profit and cash. Many could not tell the difference between a profit and loss account and a balance sheet. Two thirds did not realise that discounts have a negative effect on gross margin.

The article concludes that in today’s organisations, ‘most people don’t ask because they don’t want to appear uninformed in front of their boss or peers.’ Yet from the survey’s own figures, most shouldn’t worry – their bosses or peers probably don’t know either.

The study’s interesting evidence backs up our own feedback. Our development programmes often include a finance quiz used both to determine what existing level of knowledge our delegates arrive with, and also as an opening for explaining some of the financial terminology. And while the content of these quizzes is tailored to the audience – little point in asking service businesses about stock management – they produce similar results, with marks routinely running at a barely ‘passable’ 50%.

Why is there a lack of financial knowledge outside the finance function?

This is an extract from the Finance & Management Magazine, Issue 195, January 2012.

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