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Why Leaders Need Financial Literacy

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by Amol Maheshwari and Shweta Jhajharia, authors of SCORE: The Fundamentals of Building a Financially Successful Business

“Money without financial intelligence is money soon gone
– Robert Kiyosaki

Do you know how to read a balance sheet, calculate your return on investment, or forecast your cash flow? If you are a leader in any organisation, these are some of the financial skills you need to succeed in today’s complex and competitive business environment. Financial literacy is the ability to understand and use financial information to make sound decisions, communicate effectively, and achieve strategic goals.

In this article, we explain why financial literacy is important for leaders, and how they can improve their financial knowledge and skills.

The Benefits of Financial Literacy for Leaders

Financial literacy can help leaders in many ways, such as:

Setting realistic and achievable goals.

By understanding the financial situation of their organization, leaders can plan ahead, allocate resources, and measure progress. They can also identify potential risks and opportunities and adjust their strategy accordingly. For example, a leader who understands the revenue and sales figures of their organisation can spot trends and patterns, and optimize their pricing, marketing, or inventory strategy.

Communicating effectively with stakeholders.

By understanding the financial reports of their organization, leaders can explain their performance, justify their decisions, and persuade their investors, customers, employees, and partners. They can also use financial data to support their arguments and proposals. For example, a leader who understands the gross profit margin of their organization can demonstrate their efficiency in production and sales and negotiate better terms with suppliers or clients.

Making informed and confident decisions.

By understanding the financial options of their organization, leaders can evaluate the costs and benefits of different alternatives and choose the best one for their organization. They can also avoid common financial mistakes, such as overspending, underinvesting, or mispricing. For example, a leader who understands the accounts receivable aging of their organization can manage their cash flow and enforce timely payment policies.

Enhancing their credibility and reputation.

By understanding their financial responsibilities, leaders can comply with the laws and regulations, and avoid legal or ethical issues. They can also demonstrate their competence and professionalism and earn the trust and respect of their stakeholders. For example, a leader who understands the debt-to-equity ratio of their organization can maintain a healthy balance between debt and equity and avoid financial distress or bankruptcy.

How to Improve Financial Literacy as a Leader

Financial literacy is not a fixed trait; it is a learnable skill that can be improved with education and practice. Here are some ways that leaders can enhance their financial literacy:

Read up on the basics of finance.

There are many resources available online or offline that can help leaders learn the fundamentals of finance, such as financial terminology, statements, concepts, and tools. One of them is our book SCORE: The Fundamentals of Building a Financially Successful Business, a practical and comprehensive guide that will help you master the key metrics that matter for your business.

Apply the knowledge to real-world scenarios.

Reading is not enough; leaders need to practice using their financial knowledge to solve problems and make decisions in realistic situations. They can use case studies, simulations, games, or exercises that challenge them to apply their financial skills and concepts.

Seek feedback and guidance from experts.

Learning from others who have more experience or expertise in finance can help leaders improve their financial literacy faster and more effectively. They can seek feedback from mentors, coaches, peers, or consultants who can offer them advice, insights, or tips on how to use financial information better. One of them is Growth Idea, UK’s leading SME business coaching company.

Conclusion

Financial literacy is not an optional skill for leaders; it is an essential skill that can help them succeed in any area of business. By understanding and using financial information wisely, leaders can set goals, communicate effectively, make decisions, and enhance their credibility. Therefore, I encourage all leaders to invest in improving their financial literacy skills as soon as possible.

 

Amol Maheshwari is the Managing Partner and M&A head at Growth Idea. Shweta Jhajharia is a leading global business coach and founder of Growth Idea. Their new book Score is the ultimate handbook to help SME business owners and senior leaders master the fundamentals of finance in order to propel them towards unprecedented success.