I find it interesting how finance is thought of by many people in the world of business. I encounter many people that look at numbers with horror. Ask them to identify costs and benefits and they freeze up. In my experience there are four big groups of financial stereotypes in the business world:
- Ask the Finance team – This group isn’t going to deal with the numbers themselves but they have a finance partner on speed dial.
- Jump to the Spreadsheet – This group will start pounding out spreadsheets but they don’t always really understand what they are doing. You’ll get numbers but maybe not the right ones.
- Back of the Napkin – This group understands the fundamentals and quickly starts scratching out an estimate of where things should be. If you need a detailed analysis, they can do it but focus on what matters.
- It’s all about EPS – This group ties every financial metric back to one big high-level metric (could be earnings per share, or IRR, or payback) because they think that’s the only thing that matters.
The group I most relate to is the “Back of the Napkin” club. Most financial questions can be answered pretty quickly without detailed evaluation. If you do need to get down into the nitty gritty, it’s best to understand where and why so you can put together the analysis the right way.
The group that scares me the most is the EPS team. They have a metric that they try to make every analysis fit into whether it makes sense or not. Some decisions cannot be made the way others are. You’ll never sign a real estate lease if your only metric is strictly maximizing earnings per share because you could always take a little less space or move to a lower cost area or structure that lease a little differently.
Financial literacy in business is mostly about making sure you apply the right financial analysis at the right time. A few rules of the road for those so inclined:
- Don’t provide answers to the penny if you analysis has a handful of rough assumptions.
- Never provide a single point estimate where assumptions cannot be easily nailed down – ranges are perfectly acceptable.
- Present numbers in a way that the intended audience will understand – don’t provide an IRR if your audience doesn’t know what NPV is.
- Know when to estimate and when to get detailed. Most of the times an estimate is all you really need.
- If you have to get detailed, get very detailed.