Numbers tell a story and there’s always a story behind the numbers.
Over the course of Culture Partners’ existence, we have had a front-row seat to how organizations and their leaders have adapted and evolved to meet the demands of the business world. It’s not that the following topics or metrics were ever unimportant… but there has been a shift in executive focus and initiatives to drive business success. This shift in focus on certain metrics keeps track of that evolution. Like anything else, with time, people get better. When organizations surround themselves with smart people, they figure out ways to do everything better.
Profit and loss
In the early ’90s, it was common for organizations to want their managers to see a big-picture view of the numbers and financial concepts. There was also a huge focus on margin – and gross margin in particular. The priority and executive focus was on the income statement: profit and loss, revenue, expenses, and the bottom line.
At the time, focusing so heavily on margins, P&Ls, and big-picture strategy only gave learners a cursory understanding of how their organization functioned: it didn’t necessarily connect their individual actions to the financial outcomes.
Lean, mean manufacturing machines
Years later, moving into the 2000s, organizations began prioritizing more well-rounded business acumen. Simply managing a P&L well didn’t mean a manager had contributed to the company’s overall financial health. Bloated inventories or insufficient cash flow could – and did – lead to some serious issues. The concepts of working capital management and “cost of capital” came to the forefront of business acumen training.
The focus shifted to managing a healthy balance sheet – in addition to monitoring the P&L. This is how EVA (Economic Value Added), CROGI (Cash Return on Gross Investment), and other similar metrics became popular as they pull in elements of the balance sheet to give a more holistic view of the health of an organization.
Cash has always been and will continue to be a key focus point for any business acumen training; in particular, making sure it doesn’t get tied up in things like too much inventory or property, plant, and equipment (PP&E).
The focus on managerial business acumen skills shifted to a deeper understanding of how specific decisions affected the P&L, the balance sheet, and the cash flow statement. Especially in manufacturing organizations, smart balance sheet management began to play a critical role.
With this focus on operational efficiency came the buzzword “lean.” This is still an important concept today, but now it’s more about better inventory management and increasing operational efficiency as a whole.
Speaking the same language
While managing a P&L and balance sheet well – and keeping healthy cash flow – are still foundational skills for great managers, leaders of organizations realize that the more their managers understand the language of business and the story behind the numbers, the better they will drive success.
Today, there’s still an emphasis on the cost side of margins. In a competitive environment, it’s harder to raise prices, so the other way to increase margins is to reduce costs.
Further to this, an increased focus on operational efficiency is the descendant of lean manufacturing. The focus is on standard costs and variance management. With this comes the ability to make strategic decisions about capital investments that could increase operational efficiency, which means higher margin gains (i.e. increased profits, which ultimately results in higher shareholder value).
Understanding ROIC (Return on Invested Capital) allows managers to evaluate the potential upside and downside of capital investments within an organization. Not only are these capital investment decisions about operational efficiency, but they’re also about driving innovation.
Innovation costs money. If managers know how to speak the language of their partners in finance, they can better present a capital investment opportunity through the lens of evaluating the financial and operational risks/rewards.
They can think holistically about the potential payback period, the NPV (Net Present Value) of the capital, and the tradeoffs of allocating those resources there instead of elsewhere in the business.
Understanding these concepts and speaking the language of business finance creates better partnerships inside organizations, especially with finance teams, and empowers employees to be better stewards of an organization’s resources.
This has led to a greater entrepreneurial spirit in today’s leaders, emphasizing qualities of ownership and accountability.
The story behind the numbers
To come full circle: numbers tell a story and there is always a story behind the numbers. It’s a never-ending cycle that allows leaders to continuously evaluate how they are executing on the strategies set forth. When the story’s numbers provide evidence of earlier actions, it informs how to adjust, abandon, or recreate the narrative. And for most organizations, having leaders that understand the story and the numbers is critical to long-term success.
Empowering managers in the organization with business acumen causes them to become vested in the organization’s success. Organizations are powered by the people: they deliver the results, affect the business metrics, and write the story behind the numbers with their decisions and actions every day.
