Beyond Financial Literacy:

The Importance of Business Acumen Training for Managers and Employees

By Raymond Green
Summary: Training your employees and managers on the concept of business acumen, which means going beyond financial literacy to a true understanding of what it takes for a business to make money, is the key to producing real results for an organization. The message to CLOs is becoming clearer and clearer. Company leaders want them to align educational offerings with the organizations strategic objectives. Thats not an easy challenge. They must ensure that education and communication initiatives reinforce the companys goals. They must help employees understand these goals and develop the skills and motivation to contribute to them. And at the most basic level of alignment, they must make sure that every employee understands how the company makes money. That includes understanding how profitability is driven, how assets are used, how cash is generated and how day-to-day actions and decisions, including their own, impact success. Developing business acumen is fundamental to business alignment. Consider Southwest Airlines, which was founded in 1971. With 33 straight years of profitability, the airline has become widely recognized for the motivational culture it creates for employees and its extraordinary dedication to customer service. Much of the industry has suffered during the years of Southwests growth, including many airlines that have merged or declared bankruptcy. Southwest buys the same planes and the same jet fuel as other airlines, and pays its employees competitive wages and benefits. Whats the difference? 5 ways business acumen training helps organizations survive in tough economic times.....................(page 11) How two of the countrys leading companies used business simulations to help managers and employees impact the bottom line......(page 6)

Contents
In this white paper, youll learn: The definition of business acumen.................(page 2)

Unlike some of its competitors, Southwests management team involves employees in the companys financial results, explaining what the numbers mean and, more important, helping to link everyones decisions and actions to the bottom line. The airline has an open culture, one of inclusion at all levels, and employees understand their roles in providing great service and keeping costs in line. Certainly there are other factors that contribute to the success at Southwest, but its difficult to ignore the positive impact of an approach that develops the business acumen of all employees and managers so that they can contribute to the airlines success.

designed to develop a strong foundation of financial literacy and business acumen has made the communication of financial results to employees easier and more effective.

Business Acumen: A Definition

Very simply, business acumen is the understanding of what it takes for a business to make money. It involves financial literacy, which is an understanding of the numbers on financial statements, as well as an understanding of the strategies, decisions and actions that impact these numbers. Someone with financial literacy, for example, would be able to read the companys income statement. This employee or manager would understand the terminology (revenue, cost of

An Educational Challenge
Unlike those at Southwest, individual contributors and managers in many organizations today have not been educated about the big picture of their businesses. They have a narrow focus on their own departments and job functions and arent able to make the link between their actions and the companys success. Multiplied by hundreds or even thousands of employees, this lack of understanding the lack of true business acumen means that too many decisions are being made and too many actions are being taken that dont align with business objectives. How can training help bridge this knowledge gap? For many companies like Southwest, implementing learning programs
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goods sold, gross margin, profit, etc.) and what the numbers represent (i.e., gross margin equals total sales/revenue less the cost of goods sold). With business acumen, the individual would be able to interpret this same income statement, taking into consideration how company strategies and initiatives have impacted the numbers during specific periods of time. Consider a simple comparison: In football, its necessary for players to know how the game is scored as well as how to play the game to change the score. In business, financial literacy is understanding the score (financial statements) and business acumen is understanding how to impact it (strategic actions and decisions).

Asking the Right Questions

When business acumen spreads through an organization, employees and managers begin to ask questions. These questions are directed not only at the organization, but also at themselves and their departments questions about processes, products, systems, staffing and more that can lead to necessary and innovative decisions and actions. Business acumen helps everyone understand that its not enough to ask, How do we cut costs? or to say, We need to increase sales. Digging deeper, employees with higher levels of business acumen will ask questions that take into consideration the far-reaching impact of potential decisions and demonstrate a greater ability to make the connections between performance and results.

Can we raise prices, still provide value to the customer and remain competitive? When questions become more specific, the right decisions can be made.

Business Acumen for Managers

Managers at all levels need a high level of business acumen to do their jobs. Every day, they make decisions about employees, projects, processes, expenditures, customers and much more decisions that ultimately roll up into larger organizational results. Managers who make these decisions while looking through a departmental lens only, with a limited understanding of how these decisions affect financial results or how they are tied

Questions that could get to the root of disappointing operating ratios:

Have production costs gone up? If so, why? Have we changed prices? If so, how has that affected our margins? Are there any competitive issues impacting our performance? Have there been any customer requirement changes? If our costs per unit produced have gone up, can we better control the efficiency of our production or service delivery? Is there a way to produce a greater product volume at the same cost?
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to the organizations goals and objectives, are working in silos that can ultimately damage the company. Managers are often promoted to their positions of responsibility because of their technical expertise. Theyve been successful customer service representatives, great salespeople, innovative researchers or well-respected IT professionals. They are now entrusted with decision making, budgets, projects and people. They often do not have financial literacy, nor have they developed a higher-level perspective about the business. Over time, especially if they move up the managerial ladder, they may develop these. Or they may not.

Organizations need managers who operate as part of the management team, taking accountability for their own results as well as the results of the entire company. Therefore, more and more organizations have built financial literacy and business acumen into managerial competency requirements and have integrated business acumen training into management curriculums.

good customer or allow safety issues to escalate. Without an understanding of how their actions impact the companys results, they might not have the context to consider alternatives. Many organizations have

During a business acumen session, new managers at a major retailer found out just how difficult it is to make a profit. Their facilitator used this example: A warehouse employee dropped several cases of lightbulbs. The bulbs shattered and so did the opportunity to make a $25 profit. The first reaction of the class was, So whats $25 to us? But after calculating thecompanys net income at just over 1 percent, they realized that the store would have to sell $2,500 in new merchandise to make up for the lost profit on the shattered bulbs!

determined that financial literacy and business acumen arent just for managers anymore. They have decided to develop a company of people who understand the business; who know what return on assets and return on investment mean; who know how inventory turnover rates affect results and the importance of positive cash flow; who see the connection between the companys financial success and their own health benefits, 401(k) plans and more. In other words,

Business Acumen for Employees

Although there is little debate about the need for managers to develop business acumen, organizations sometimes question the need for this understanding at employee levels. But frontline

contributors, those who are most directly involved with production or customer service, for example, take actions every day that impact business results. Consider the salesperson who discounts products, or the service representative who deals with an unhappy customer, or the maintenance person who notices a problem. The actions each of them takes might erode profit margin, lose a
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they need people who understand the business of the business. In his book Good to Great, Jim Collins says, We found no evidence that the good-to-great companies had more or better information than the comparison companies. None. Both sets of companies had virtually identical access to good information. The key, then, lies not in better information, but in turning information into information that cannot be ignored. 1

With an increased level of business acumen, managers and employees can better interpret information, making the connection between their actions and the companys results.

The Big Picture

As we have become a nation of specialists, armed with new information technology and enterprise-wide operating systems, it has become easier for managers and employees to become myopically immersed in their own jobs. This immersion can have the effect of obscuring their view of the big picture. They may not consider the cumulative effect of wasted assets. They may have little regard for the objectives and responsibilities of other team members, departments or divisions. They may lack the motivation to invest personal energy in critical project work. Organizations that engage in developing business acumen provide a clearer vision and an overall context within which employees can work, while creating an environment that is more likely to break down internal barriers. There is less waste and less ambivalence. There is increased innovation. Employees are more engaged, they understand their role and its impact on business results, and they are more likely to believe that their efforts really matter. They are more likely to think like a business owner.

Another Reality of Todays Business World

A public companys operating results are well known at the end of each quarter. Analysts, investors, the media, employees everyone has access to a companys financial results. With a significantly increased focus on accounting improprieties over the past few years, senior management has become highly conscious of the need to provide accurate and timely financial information. And employees have become much more likely to wonder about these numbers. Is my company being honest? Are the numbers telling the whole story? Without a fundamental understanding of financial results and an ability to interpret them, employees may become suspicious and, ultimately, disengaged. Disengaged workers, in turn, negatively impact productivity and profits. CEOs of public companies, then, must ensure that managers and employees are able to understand the numbers and have confidence in them. That means effective business acumen education as well as ongoing and open communication from the top. Former GE chairman Jack Welch said in his book Straight from the Gut, Getting every employees mind into the game is a huge part of what the CEO job is all aboutTheres nothing more important.
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Think Like an Owner

To be successful, business owners must be able to helicopter above day-to-day issues and see the big picture. They must understand how the pieces of the business fit together to impact profitability and cash flow, and they must be able to assess the risks and rewards of potential decisions. The best business

owners study the numbers, ask themselves tough questions, analyze their mistakes and take decisive action. To truly understand the business, owners have to understand how that business makes money in other words, how it produces sales, profit and cash. Organizationally, they know that its about people, processes and productivity. On the customer front, its about satisfaction, loyalty and market share. Ultimately, every action taken and every decision made in any of these areas will impact sales, profit or cash. When managers and employees begin thinking like owners, they, too, look at the big picture, understand how all the pieces fit together, and assess risks and rewards. They understand, like an owner, how the company makes money, how it stays in business and how they contribute to its success. The benefits to an organization of engaging managers and employees in this kind of ownership thinking are obvious. So how can a company develop the business acumen of its people?

The Authors Story

In my first business, I sold double knit sport coats out of the back of my station wagon. I bought them for $15 and sold them for $30. My customers were individuals and they paid me on the spot. The business was small, very profitable and the cash flow was great! As that business grew, I sold larger orders of coats to retailers; revenues and accounts receivables grew. That should have worked well, right? Wrong. Retail customers sometimes took up to 90 days to pay and I learned a painful lesson: Profit and cash are not the same thing. My next business involved employees. Lots of them. And I learned another lesson. Many of my employees thought there was an inexhaustible supply of money for supplies, inventory, marketing and benefits. It was easy for them to see the sales rolling in. It was harder for them to see the costs of operating a business. So I learned that Id better share the numbers with them and get them involved in making those numbers work for the good of the business and themselves. My signature was on the credit line, but my employees were on the front line! In my current business, I continue to educate my

Developing Business Acumen: Two Stories

Entrepreneurs are generally forced to develop business acumen on their own. They are hands-on with their businesses and have to make all the decisions as they go along, whether good or bad. They either learn from their mistakes or fail. Its very different for managers and employees in an organization.
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employees and involve them in the business. At the same time, my company works with Fortune 1000 companies to help them develop the financial literacy and business acumen of their managers and employees. Ive learned that companies, big or small, need an educated workforce that understands how the company makes money and where they fit into the big picture of financial health and stability.

They arent involved in all aspects of the business, and they make decisions primarily within their own areas of responsibility. Since seeing the connections isnt easy, they need to learn in some other way. Books and lectures can help. But business acumen is best developed experientially. Learners must be able to analyze situations, ask questions, discuss issues with other learners, consider options, make mistakes and see results. Although there are a variety of ways to accomplish this kind of experiential learning, many companies have found that simulations, which mirror reality and allow learners to experiment in a safe environment, are one of the best ways. Here are the stories of two companies who chose to educate their learners with business simulations.

to make good decisions. A companywide survey had clearly demonstrated this need especially for managers of employees who had direct contact with customers.

Business simulations are designed to immerse learners in situations similar to those that they encounter in their jobs. Effective simulations will engage learners through a variety of discovery learning techniques: case studies, colorful visuals, team activities and gaming elements.

For example, if a customer calls with a service problem, frontline employees and their supervisors can issue credits to the customers account in an effort to resolve the issue. Although this may be exactly what is needed for the situation, Comcast realized that employees making these decisions didnt necessarily understand that a $10 credit could ultimately

require more than $100 in revenue for the company to break even. Similarly, a service technicians visit to a customers home might cost $50 directly, but the company might have to sell an additional $500 in services to cover the cost. The lack of financial acumen among supervisors and

Comcast Cable Communications

The NorthCentral Division of Comcast one of the countrys largest entertainment, information and communications companies, specializing in cable television, high-speed Internet and telephone service set out to ensure that managers and employees throughout the organization had the financial acumen required
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employees was largely understandable, says Mark Fortin, senior vice president of finance for Comcasts NorthCentral Division. Almost 75 percent of the companys employees are on the front lines in roles such as call center personnel or field technicians. They are trained to be good at what they do, but their backgrounds typically dont include emphasis on financial literacy.

Comcast human resource executives determined that a fundamental approach to the development of business acumen was needed. However, this approach also would need to be fast, engaging and job-relevant. Expanding upon its already robust Comcast University management curriculum, the executives chose to integrate a high-energy, tailored learning experience that would provide the basics and, at the same time, deal specifically with Comcast terminology, concepts and strategic imperatives. As they participated, learners made decisions about products, processes, pricing and more, and they saw how those decisions impacted financial success. In the end, it became easier for them to make sharper day-to-day choices. The thing that sticks out for the frontline leaders, the field technicians, and the call center supervisors and managers who attend, is the high cost of sales in our business, says Sophia Alexander, senior manager of curriculum and metrics for the division. Its like a bell goes off in their heads when they realize what it costs for us to earn what we need to earn to run the organization. Attending the learning session is not mandatory for supervisors and managers. However, there is an unwritten expectation that they will participate in business acumen training as well as other Comcast University core programs, according to Jan Underhill, senior manager of leadership development for the NorthCentral Division. That expectation, coupled with the fact that manager compensation has recently become tied to meeting specific financial goals, has kept attendance high.
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Senior executive support also has been an important factor in creating interest and awareness around financial literacy. Getting people to sign up is much easier when senior executives like Mark Fortin are strong advocates for the program, says Underhill. Feedback has been resoundingly positive. On average, for example, Level 1 feedback about the discovery learning based business acumen sessions has been 4.5 on a 5-point scale. That means that the program has exceeded expectations. Better than that, says Sophia Alexander, senior manager of curriculum and metrics for the NorthCentral Division, is the empirical evidence that the new insights and knowledge have made a difference. For example: Participant self-evaluations indicate that financial literacy has increased by at least 25 percent as a result of the business acumen training. After the training, there was a 20 percent increase in the participants ability to use basic financial terms and concepts on the job. Almost 45 percent of supervisory participants report that they are using their business acumen knowledge in daily communications with staff and peers. Some people, particularly in big companies, feel like there is an open checkbook. They think I dont own the company. Its not my problem. Somebody will pay the bills. But in todays environment, with some very large companies in trouble, everyone needs to be part of the solution. Business acumen

education for managers and employees helps the company as a whole, but it also helps employees. Its about self-preservation to some extent. comments Fortin.

airline industry operating cost-per-seat mile. This is how much it costs an airline to fly one seat one mile. All the operating costs are divided by the total number of seat miles (the total number of miles of all the seats that were flown for a given period, whether

Southwest Airlines
Southwest Airlines is one of the consistently profitable companies that makes business literacy a core component of its employee training programs. Every employee has a solid understanding of what a new customer, and new revenue, means to the company. Employees also know how the loss of a customer can impact the business. According to Elizabeth Bryant, director of leadership training at Southwest Airlines, Our training covers how the financial ratios such as return on assets and various margins are determined. Knowing that team managers, supervisors and all employees have this knowledge enables the companys leadership to present detailed financial reports and explain to the teams where the margins need to be. Management can speak more in depth to all the employees, and the employees understand what the objectives are. Bryant added, Because we dont waste the little things, because we track every penny and every activity, weve all come to know the importance of each cent. With the pennies in hand, we spotlight the idea of compound interest for example, how the small savings help us by years end and how small amounts of waste can conversely add up to hurt us. Consider the importance of a key operating metric for the
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a passenger was in the seat or not). Much of the industry has had cost-per-seat mile results at or over 10 cents. Southwest Airlines cost-per-seat mile is about 6.5 cents. The lowest cost-per-seat mile in the industry almost 25 years ago was just over 5 cents. How do they do it? Certainly there are a number of factors that lead to success. However, one of the key influences is Southwests ongoing training in business acumen. This training ensures that employees know: How challenging it is to ensure ongoing profitability; making a profit can never be taken for granted The importance of utilizing the benefits of the good years to prepare for the tough years The impact of individual actions and decisions to the bottom line In other words, Southwest invests in training to help employees think like business owners. This, in turn, produces real results, like its consistently low cost-per-seat mile. When Southwests learning team decided to implement a business acumen simulation several years ago, there was some initial concern about how well it would be received. Bryant explained, Some people, especially those without financial training, were nervous about the topic. We are such a people-oriented

company that we didnt want people to think that now were just a financially oriented company and everyone will be judged purely on financial performance. But we positioned the need for the business literacy training as another way to prove that we actually care tremendously for each employee. We explained that if you understand what the numbers mean then you can better understand how your work provides an integral contribution to the business. Southwest Airlines, according to Bryant, has never had a layoff a rarity in the airline business. The more their employees understand the challenges of the business, the better they appreciate the importance of making smart decisions every day. Bryant concluded that the discovery learning techniques in a robust business simulation work well in the Southwest culture because of the team orientation. All the participants learn that they cant individually make it all happen, said Bryant. They learn that they have to look beyond themselves, act and think like an owner, and realize that our efforts and financial results here are not just for a career, but for a cause. Its this cause-oriented philosophy toward delivering a low-cost, high-quality service that allows people the opportunity to travel. Our success at achieving positive results translates to individual opportunities to work, to grow and to continually think of innovative ways to improve our business and serve our customers.

facilitated by instructors at company sites. Although online options were available and were used in some cases to supplement the instructor-led training sessions, they decided that there were significant advantages to tackling this subject in a live session where they could leverage the power of: SHARED KNOWLEDGE AND EXPERIENCE: Learners bring their own perspectives and issues to the session. TEAMWORK: Learners work together, make decisions together and rely on each other as they learn. COMPETITIVE FUN: Small teams play against each other and enjoy a competitive environment. COMPANY-SPECIFIC DISCUSSIONS: The learners common interest in their own companys financial and strategic issues allows for greater analysis and depth of discussions and a true connection between the learning simulation and the organizations reality. LEARNING MOTIVATION AND COMFORT: Learners who may not be comfortable with the subject of finance find themselves playing a game in the comfort of a team environment. Although there are a number of educational approaches available to organizations in the area of business acumen, classroom-based training that brings together teams of learners

The Classroom Advantage

These two companies chose to develop the business acumen of managers and employees by using a classroom-based simulation,
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can help ensure that learning occurs and that connections to the business are made in ways that prompt action back on the job.

The Bottom Line

More than ever, successful companies will need to focus on developing the business acumen of managers and employees. These companies will realize that when their people understand the numbers, when they understand how their departments contribute to the companys objectives and when they see how their own decisions and actions make a difference, they will begin to operate as part of a team rather than in a departmental or personal silo. And a critical piece of the alignment puzzle will be solved. With widespread business acumen, companies can have a powerful asset educated, knowledgeable and motivated employees. And with this asset, those will be the companies best positioned to succeed.

5 Ways Business Acumen Training Helps Organizations Survive in Tough Economic Times
In tough economic times, managers and employees with business acumen are better prepared to act in ways that positively affect profitability and cash flow because they:
1.

Understand the story behind their companys numbers.(i.e., the impact of economic conditions, competitive pressures, regulatory changes)

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Recognize the realities of the current economic situation and how these realities are affecting the companys ability to drive revenue and profitability

3.

Understand that tough economic times can require that companies make difficult decisions to remain competitive and financially sound

References
1 Collins, Jim. Good to Great. HarperCollins Publishers. 2 Stack, Jack. The Great Game of Business. Currency Doubleday. 4.

Realize why specific new initiatives are being implemented and how they can help keep the comvpany strong

Author: Raymond D. Green Chief Executive Officer, Paradigm Learning

Raymond (Ray) Green is cofounder and CEO of Paradigm Learning. Paradigm Learning is a corporate training and communications company specializing in the design of business games, business simulations and Discovery Maps.
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5.

Take actions in their own jobs that are supportive of the companys tough times strategies

For more information on Zodiak: The Game of Business Finance and Strategy or to schedule a product demo, call (727) 471.3170 or visit ParadigmLearning.com.

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