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Financial competence is not a static variable, in that it is something that is ever-changing, and the skills associated with being financially competent must be sharpened consistently. The fact is that failure to have financially competent decision makers can be highly destructive to an organization. What is meant by “financially competent” goes well beyond being able to identify credits or debits or being able to properly read financial reports. Being financially competent should focus on one’s ability to break down the financial information provided in those reports and analyze how they should be used to determine the financial path of the organization going forward. Furthermore, a person must be able to understand how risk factors into the financial decision making matrix and how that risk should affect the courses of action taken by the company. These are the things that separate competent financial management from incompetent financial management. This is likely a major reason why roughly 21% of all CEOs serve in a financial oversight position prior to becoming a CEO and why almost a third of CEOs have served in a financial capacity at some point in their careers.
It is also important to realize that the outcome of certain situations has no bearing on the competence of the decisions that have been made. The fact is that poor financial leadership can still yield success from a periodic standpoint. In the same manner that an unskilled Poker player can have a run of “good luck” and win big in a night of gambling, so to can incompetent financial managers “GET LUCKY”. The problem with depending on luck to manage the financial infrastructure of an organization is two-fold:
1. Luck does; and will always run out at some point in time
2. Financial management isn’t gambling; especially when considering what’s at stake whether it is the shareholders, the market, the employees, or the customers; there is simply too much at stake to make financial management a “Coin Flip”
To ensure that the key decision-makers are financially competent it is incumbent upon management to analyze the knowledge of these individuals and provide opportunities for them to update and hone their skills as it relates to financial management. The good news is that most organizations generally select the financial decision-makers within their organization by doing a thorough search; this generally allows them the opportunity to select the person that they feel best can handle the position. Furthermore, most organizations that utilize committees to help manage operations have a financial management committee (as it is considered to be the most common among companies with three or more committees). The problem is that many companies don’t understand the position enough to fully handle this search, so they end up hiring people that have had past success without determining whether the source of that success was luck or skill.
If the current global economic calamity has taught us anything; it has taught us this: When the economic climate is advantageous to organizations it is much easier to seem competent than when things go bad. In a good economic climate decision-makers can take huge risks and if they win they are superstars; if they lose there are generally opportunities to mitigate that loss (either by acquiring debt capital; increasing sales, or raising equity funds just to name a few). In a bad market we have discovered that THE SAFETY NETS ARE GONE; and risky decisions have real consequences. In this market we are finally paying the price to learn that there is a real difference between corporate sponsored gambling and effective financial management. What we need to do now is train current and future financial decision-makers about what makes an executive financially competent, and what does not. This will produce more effective financial decision-makers and more importantly it will provide a future asset for companies that will assist them in diverse market situations; NOT JUST WHEN TIMES ARE GOOD.
The solution:
The following are some of the steps that key decision-makers need to take in order to assist the company in building a more competent and more effective financial management infrastructure.
1) Your executive Finance team: To have a financially competent executive team; YOU NEED A TEAM; there is ALWAYS an inherent danger in leaving major financial decisions to a few individuals. The fact is that we are talking about money; and when that is the subject then many times self interest replaces corporate interest in the decision making hierarchy. Furthermore a company that has a properly chosen team of individuals to make decisions provides a system of checks and balances which mitigate the risks associated with these decisions.
2) Training Courses in Finance: Another conduit would be to get a day or two day workshop in financial training where current decision makers receive tutelage in financial decision making from an application standpoint instead of an academic or theoretical standpoint. Bringing in people that have a history of being competent financial managers will be helpful. But also teaching examples of how poor decisions have destroyed companies would be helpful as well. Many course offer sound coverage of financial topics of importance. However, it is important to check background, experience and credentials of the trainer before embarking on a course.
3) Get a Coach or Corporate Consultant: Coaching at executive level has proven to be popular in many parts of the world. Experts believe that the value an executive coach (whether it is a successful consultant, former executive, or entrepreneur) adds, significantly impacts progression and drives performance to a higher level. There are many coaches available but you need to ensure you get a coach who will listen to your concerns at the same time offer the right and relevant professional advice. With the advent of the internet, organizations also offer virtual coaching support.
4) Have self-analysis meetings: At least once a year all organizations should seek to have a meeting with all people involved in the financial decision making process (executives, senior financial/accounting personnel, board members, etc.) and simply have a brain-storming session that focuses on the direction of the organization; future financial needs, current financial position, etc. These meetings have a way of bringing issues to light that otherwise would stay in the dark; and furthermore you want all of these people to work well with each other, and this is a good platform to start from.
While most organizations believe that the decision making aspect of their financial infrastructure is at least competent; the fact is that many organizations aren’t aware of what constitutes competence as it relates to financial decision making. The fact is that, no matter where your organization is located, the WORLD HAS CHANGED for companies; to stay prosperous companies must focus on sustainability and not luck; they must focus on consistency and not major peaks. Financial competence has little to do with an education in finance, it has everything to do with how your executives can use that information and analyze the health and the future of the organization. Those that understand this are in an advantageous position; those that don’t are playing with fire. initial public offering services