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Excerpts From the Book

You Can’t Always Trust the Numbers
from Chapter 1

If you read the papers regularly, you have learned a good deal in recent years about all the wonderful ways people cook their companies’ books. They record phantom sales. They hide expenses. Some of the techniques are pleasantly simple, like the software company a few years back that boosted revenues by shipping its customers empty cartons just before the end of a quarter. (The customers sent the cartons back, of course—but not until the following quarter.) Other techniques are complex to the point of near incomprehensibility. (It took years for accountants and prosecutors to sort out all of Enron’s spurious transactions.) As long as there are liars and thieves on this earth, some of them will no doubt find ways to commit fraud and embezzlement.

But maybe you have also noticed something else about the arcane world of finance, namely that many companies find perfectly legal ways to make their books look better than they otherwise would. Granted, these legitimate tools aren’t quite as powerful as outright fraud: they can’t make a bankrupt company look like a profitable one—at least, not for long. But it’s amazing what they can do. For example, a little technique called a one-time charge allows a company to take a whole bunch of bad news and cram it into one quarter’s financial results so that future quarters will look better. Alternatively, some shuffling of expenses from one category into another can pretty up a company’s quarterly earnings and boost its stock price. While we were writing this book, the Wall Street Journal ran a front-page story on how companies fatten their bottom lines by reducing retiree’s benefit accruals—even though they may not spend a nickel less on those benefits.

Everybody who isn’t a financial professional is likely to greet such maneuvers with a certain amount of mystification. Human resources—like most other aspects of business, including marketing, research and development, and strategy formulation—is at least partly subjective, a matter dependent on experience and judgment as well as data. But finance? Accounting? Surely, the numbers produced by these departments are objective, black and white, indisputable. Surely, a company sold what it sold, spent what it spent, earned what it earned. Even where fraud is concerned, unless a company really does ship empty boxes, how can its executives so easily make things look so different than they really are? And short of fraud, how can executives so easily manipulate the business’s bottom line?


We want to make finance as easy as possible. Most finance books makes us flip back and forth between the page we’re on and the glossary to learn the definition of a word we don’t know. By the time we find it and get back to our page, we’ve lost our train of thought. So here we are going to give you the definitions right where you need them, near the first time we use the word.


The fact is, accounting and finance, like all those other business disciplines, really are as much art as they are science. You might call this the CFO’s or the controller’s hidden secret—except that it isn’t really a secret; it’s a widely acknowledged truth that everyone in finance knows. Trouble is, the rest of us tend to forget it. Or maybe we suspected it based on the interactions we’ve had with the finance department, but we never felt confident enough to pursue the matter. It seems like if a number shows up on the financial statements or on the finance department’s reports to management, it must accurately represent reality.

In fact, of course, that can’t always be true, if only because even the number jockeys can’t know everything. They can’t know exactly what people in human resources (and in all the other departments) do every day, so they don’t know exactly how to allocate costs. They can’t know exactly how long a piece of equipment will last, so they don’t know how much of its original cost to record in any given year. They can’t predict exact payouts for incentive plans, so they don’t know exactly how much to budget. The art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company is performing. Accounting and finance are not reality; they are a reflection of reality. The accuracy of that reflection depends on the ability of accountants and finance professionals to make reasonable assumptions and to calculate reasonable estimates.

It’s a tough job. Sometimes they have to quantify what can’t easily be quantified. Sometimes they have to make difficult judgments about how to categorize a given item.

None of these complications necessarily arises because they are trying to cook the books or because they are incompetent. The complications arise because accountants and financial folks must make educated guesses related to the numbers side of the business all day long.

The result of these assumptions and estimates is, typically, a bias in the numbers. Please don’t get the idea that by using the word bias we are impugning anybody’s integrity. (Some of our best friends are accountants—no, really—and one of us, Joe, actually carries the title CFO on his business card.) Where financial results are concerned, bias means only that the numbers might be skewed in one direction or another. It means only that accountants and finance professionals have used certain assumptions and estimates rather than others when they put their reports together. Enabling you to understand this bias, to correct for it where necessary, and even use it to your own (and your company’s) advantage is one objective of this book. To understand it, you must know what questions to ask about these assumptions and estimates. Armed with that information, you can make well-considered, appropriate decisions.

In issues related to human resources, you have to make judgment calls every day. Understanding the thought process behind those decisions helps you and others see the reasoning behind your conclusions. It’s the same in finance. As an HR manager, you should strive to understand the assumptions behind the numbers that the accounting department presents.


For example, let’s look at one the variables that is frequently estimated—one that you wouldn’t think needed to be estimated at all. Revenue or sales refers to the value of what a company sold to its customers during a given period. You’d think that would be an easy matter to determine. But the question is when revenue should be recorded (or “recognized,” as accountants like to say). Here are some possibilities:

  • When a contract is signed
  • When the product or service is delivered
  • When the invoice is sent out
  • When the bill is paid

If you said, “When the product or service is delivered,” you’re correct; as we’ll see in chapter 6, that’s the fundamental rule that determines when a sale should show up on the income statement. Still, the rule isn’t simple. Implementing it requires making a number of assumptions, and in fact the whole question of “when is a sale a sale?” was a hot topic in many of the fraud cases dating from the late 1990s.

Imagine, for instance, that a company sells a customer a copier, complete with a maintenance contract, all wrapped up in one financial package. Suppose the machine is delivered in October, but the maintenance contract is good for the following twelve months. Now, how much of the initial purchase price should be recorded on the books for October? After all, the company hasn’t yet delivered all the services that it is responsible for during the year. Accountants can make estimates of the value of those services, of course, and adjust the revenue accordingly. But that requires a big judgment call.


The income statement shows revenues, expenses, and profit for a period of time, such as a month, quarter, or year. It’s also called a profit and loss statement, P&L, statement of earnings, or statement of operations. Sometimes the word consolidated is thrown in front of those phrases, but it’s still just an income statement. The bottom line of the income statement is net profit, also known as net income or net earnings.

Nor is this example merely hypothetical. Witness Xerox, which played the revenue recognition game on such a massive scale that it was later found to have improperly recognized a whopping $6 billion of sales. The issue? Xerox was selling equipment on four-year leases, including service and maintenance. So how much of the price covered the cost of the equipment, and how much was for the subsequent services? Fearful that the company’s sagging profits would cause its stock price to plummet, Xerox’s executives decided to book ever-increasing percentages of the anticipated revenues—along with the associated profits—up front. Before long, nearly all the revenue on these contracts was being recognized at the time of the sale. Suppose you worked in HR for Xerox. You probably wouldn’t have known that the revenue number wasn’t matched appropriately to actual sales. Yet that number might have been used for incentive-plan compensation and for commission checks. It might have been used to determine which salespeople needed extra training and which didn’t. And those decisions that you would have made would have been dramatically affected by the decision to change how revenue was being recognized.

Xerox had clearly lost its way and was trying to use accounting to cover up its business failings. But you can see the point here: there’s plenty of room, short of outright book-cooking, to make the numbers look one way or another. And the implications for managers who can’t ask the right questions are huge.

A second example of the artful work of finance—and another one that played a huge role in recent financial scandals—is determining whether a given cost is a capital expenditure or an operating expense. We’ll get to all the details later; for the moment, all you need to know is that an operating expense reduces the bottom line immediately, and a capital expenditure spreads the hit out over several accounting periods. You can see the temptation here. Wait. You mean if we take all those office supply purchases and call them capital expenditures, we can increase our profit accordingly? HR isn’t immune to this kind of thinking. The department is usually seen as a cost center, so anything you can do to reduce expenses might seem like a good thing. But it’s the sort of thinking that can get you into trouble. To prevent such temptation, both the accounting profession and individual companies have rules about what must be classified where. But the rules leave a good deal up to individual judgment and discretion. Again, those judgments can affect a company’s profit, and hence its stock price, dramatically.


Operating expenses are the costs that are required to keep the business going day to day. They include salaries, benefits, and insurance costs, among a host of other items. Many companies’ largest operating expense is labor costs. Understanding the components of labor costs and what drives them is a key part of finance as it relates to HR. Operating expenses are listed on the income statement and are subtracted from revenue to determine profit.

Now, we are writing this book primarily for HR leaders in companies, not for investors. So why should HR people worry about any of this? The reason, of course, is that they use numbers to make decisions. You yourself make judgments about budgets, capital expenditures, staffing, and a dozen other matters—or your boss does—based on an assessment of the company’s or your business unit’s financial situation. You are supporting parts of the organization that deal with the numbers every day—and you provide advice and information based in part on how they are doing financially. Moreover, what you do affects the financials of those departments and units. If you aren’t aware of the assumptions and estimates that underlie the numbers and how those assumptions and estimates affect the numbers in one direction or another, your decisions, advice, support, and information may all be faulty.

Financial intelligence means understanding where the numbers are “hard” (that is, well supported and relatively uncontroversial) and where they are “soft” (that is, highly dependent on judgment calls). What’s more, outside investors, bankers, vendors, customers, and others will be using your company’s numbers as a basis for their own decisions. If you don’t have a good working understanding of the financial statements and don’t know what those folks are looking at or why, you are at their mercy.


A capital expenditure is the purchase of an item that’s considered a long-term investment, such as computer systems and equipment. Most companies follow the rule that any purchase over a certain dollar amount counts as a capital expenditure; anything less is an operating expense. Operating expenses show up on the income statement and thus reduce profit. Capital expenditures show up on the balance sheet; only the depreciation of a piece of capital equipment appears on the income statement. More on this in chapters 4 and 10.

This is an excerpt from Financial Intelligence for HR Managers: A Manager’s Guide to Knowing What the Numbers Really Mean by Karen Berman, Joe Knight, and John Case, published by Harvard Business School Press, January 2008. Copyright 2008 Business Literacy Institute. All rights reserved.


Why Increase Your Financial Intelligence?
from Chapter 3

So far our discussion has been pretty abstract. We have been introducing you to the art of finance and explaining why understanding it is an essential ingredient of financial intelligence. But who needs financial intelligence, anyway? To put it bluntly, why is this book worth reading?

For starters, we want to emphasize that this book is different from other finance books. It doesn’t presuppose any financial knowledge. But neither is it another version of Accounting for Dummies. We will never mention debits and credits. We won’t ever refer to the general ledger or trial balances. This book is about financial intelligence, or, as the subtitle says, what you really need to know about the numbers. It’s written not for would-be accountants but for everyone in human resources.

This book is also different from other numbers-oriented books aimed at HR. Those books typically focus on metrics that are specific to human resources, including those related to hiring, staffing, compensation, retention programs, training, and the like. This book, by contrast, is about general financial metrics. These are the numbers that senior managers use to gauge a business’s performance. They are the basis for many of the fundamental decisions a company’s leaders must make day in and day out.

HR professionals sometimes—maybe even many times—get a bum rap. They focus on the “soft” side of business, so it is said, rather than on the “hard” numbers side. It’s a bum rap because the numbers ultimately depend on people, and HR is the department that is most responsible for the people in a company. Still, it may be true that HR folks tend to shy away from discussions and decisions that involve finance. That hurts the company because senior management may miss out on the HR perspective. But it also hurts HR people themselves. Why? The fact is, business will always be a game of numbers, and the real players are the people who understand what the numbers mean. If you want to be seen as an integral part of the success of your company, if you want your department to be seated at the strategic table, if you want to be a true business partner to the operational unit you are supporting, then you need to be financially intelligent. “If you’re going to be in business and you’re going to work in HR, then you better understand finance,” says John Hofmeister, president of Shell Oil Company, which is Royal Dutch Shell’s U.S. division. Asked exactly what an HR professional should understand about finance, he replied, “To be blunt, everything that a business line manager should understand.”

Hofmeister believes that HR people should be able to read and understand their company’s income statement, balance sheet, and cash flow statement and that they should be able to “deal with the whole budgeting process, capital investments, depreciation, and so on.” That’s precisely what we propose to teach you in this book. You’ll learn how to read the financial statements and how to use the information they contain to do your job better. You’ll learn how to calculate ratios. You’ll learn about return on investment (ROI) and working capital management, two concepts that you can use to improve your decision-making skills and boost your impact on the organization. You’ll see pretty quickly that it isn’t hard—the concepts are straightforward, the calculations simple.

A few years ago, the directors in a sample of Fortune 500 companies took a simple financial-literacy test—and got an average of 32 percent of the questions right.1 If you read this book, you should get 100 percent.  

The Benefits of Financial Literacy

But it isn’t just a matter of scoring well on a test; financial literacy brings with it a host of practical benefits. Here’s a short list of the advantages you’ll gain.

The Ability to Move HR From a Tactical to a Strategic Organization
Historically, the human resource department was tactical in nature. Its job was to ensure that hiring and firing were done properly, that labor laws were followed, that employee benefits were properly managed, and so on. Over the past decade, however, HR has begun to transform itself. HR professionals have deepened their expertise in key fields such as organizational development and talent development. Leading-edge departments have also begun expecting HR people to understand the business and to take part in business-related discussions and decisions. General Motors, for example, has identified four critical capability arenas for HR professionals. One is pure functional expertise—all the traditional stuff that HR does, which any professional must master. Right behind it, however, is business acumen. (Change management is the third on GM’s list, and relationships and partnerships is the fourth.) HR departments that follow these priorities are on their way to becoming a strategic part of their company. If you want to be a part of that transformation—and if you want to help your department make the shift—you need to be financially intelligent.

The Ability to Evaluate Your Company Critically
Maybe you’ve had nightmares in which you worked at Enron, Global Crossing, or Sunbeam. Many of the people at these troubled companies—including the HR people who continued to supervise hiring—had no inkling of their precarious situation.

Suppose, for instance, you worked at the big telecommunications company WorldCom (later known as MCI) during the late 1990s. WorldCom’s strategy was to grow through acquisition. Trouble was, the company wasn’t generating enough cash for the acquisitions it wanted to make. So it used stock as currency and paid for the companies it acquired partly with WorldCom shares. That meant it had to keep its share price high; otherwise, the acquisitions would be too expensive. It also meant keeping profits high so that Wall Street would give it a high valuation. WorldCom paid for the acquisitions through borrowing. A company doing a lot of borrowing has to keep its profits up, or the banks will stop lending it money. So on two fronts WorldCom was under severe pressure to report high profits.

That, of course, was the source of the fraud that was ultimately uncovered. The company artificially boosted profits “with a variety of accounting tricks, including understating expenses and treating operating costs as capital expenditures,” as BusinessWeek summarized the Justice Department’s indictment.2 When we all learned that WorldCom was not as profitable as it had claimed, the house of cards came tumbling down. Many of the employees that HR had helped hire suddenly had to be laid off. But even if there hadn’t been fraud, WorldCom’s ability to generate cash was out of step with its growth-by-acquisitions strategy. It could live on borrowing and stock for a while, but not forever.

Or look at Tyco International. For all the news stories about Dennis Kozlowski’s elaborate birthday party and zillion-dollar umbrella stand, there is another story that wasn’t widely reported. During the 1990s, Tyco also was a big acquirer of companies. In fact, it bought some six hundred companies in just two years, or more than one every working day. With all those acquisitions, the goodwill number on Tyco’s balance sheet grew to the point where bankers began to get nervous. Bankers and investors don’t like to see too much goodwill on a balance sheet; they prefer assets that you can touch (and in a pinch, sell off). So when word spread that there might be some accounting irregularities at Tyco, the capital markets effectively shut Tyco off from further acquisitions. Today Tyco is focusing on organic growth and operational excellence rather than on acquisitions; its financial picture matches its strategy. A strategy of organic growth and operational excellence can mean a high level of strategic involvement by HR. Companies such as today’s Tyco may present great opportunities for financially intelligent HR professionals.

Now, we’re not arguing that every financially intelligent HR manager would have been able to spot WorldCom’s or Tyco’s precarious situation. Plenty of seemingly savvy Wall Street types were fooled by the two companies. Still, a little more knowledge will give you the tools to watch trends at your company and understand more of the stories behind the numbers. While you might not have all the answers, you should know what questions to ask when you don’t. It’s always worth your while to assess your company’s performance and prospects. You’ll learn to gauge how it’s doing and to figure out how you can best support those goals and be successful yourself.


Goodwill comes into play when one company acquires another company. It is the difference between the net assets acquired (that is, the fair market value of the assets less the assumed liabilities) and the amount of money the acquiring company pays for them. For example, if a company’s net assets are valued at $1 million and the acquirer pays $3 million, then goodwill of $2 million goes onto the acquirer’s balance sheet. That $2 million reflects all the value that is not reflected in the acquiree’s tangible assets—for example, its name, its reputation, its customer lists, the talent that it has developed, and so on.

The Ability to Understand the Business
Hofmeister, of Shell Oil, says that anyone working in a business is a businessperson—so HR people, for example, are businesspeople with a specialty in human resources. And what do businesspeople know? They understand how their company makes money. They know how its business model works. They can talk about how its accounting procedures affect its results. If you don’t understand all that, adds Hofmeister, you’re not a businessperson, and you can’t be an effective HR professional.

Tough stuff, but true. Think about it. You are working in a business. How can you be effective if you don’t know how the company makes money? Or what the numbers mean? Or how the company decides what to invest in? Imagine if you started your own business. How long would it be successful if you yourself didn’t work toward ensuring that it was successful? If your current employer is to succeed, it will need your help.

The Ability to Understand the Bias in the Numbers
We’ve already discussed the bias that is built into many numbers. But so what? What will understanding the bias do for you? One very big thing: it will give you the knowledge and the confidence—the financial intelligence—to challenge the data provided by your finance and accounting department. You will be able to identify the hard data, the assumptions, and the estimates. These projections and estimates often affect critical staffing decisions. In a tight labor market, for instance, layoffs can have hidden costs. HR professionals should know what assumptions and estimates underlie a decision to reduce headcount so that they can play an effective role in the conversation. You will know—and others will, too—when your decisions and actions are on solid ground.


The balance sheet reflects the assets, liabilities, and owners’ equity at a point in time. In other words, it shows, on a specific day, what the company owned, what it owed, and how much it was worth. The balance sheet is called such because it balances—assets always must equal liabilities plus owners’ equity. A financially savvy manager knows that all the financial statements ultimately flow to the balance sheet. We’ll explain all these notions in part 3.

And it isn’t just staffing decisions that are at stake. Let’s say you are proposing to expand your existing human resource information system (HRIS) with additional kiosks so that employees in the field can have direct access to their information. Your boss says he’ll listen, but he wants you to justify the purchase. That means digging up data from finance, including cash flow analysis for the kiosks, working capital requirements, and depreciation schedules. All these numbers—surprise!—are based on assumptions and estimates. If you know what they are, you can examine them to see whether they make sense. If they don’t, you can change the assumptions, modify the estimates, and put together an analysis that is realistic and that (hopefully) supports your proposal. Joe, for example, likes to tell audiences that he’s a veteran finance professional and could easily come up with an analysis to show why his company should buy him a $5,000 computer. He would assume that he could save an hour a day because of the new computer’s features and processing speed; he would calculate the value of an hour per day of his time over a year; and presto, he would show that buying the computer is a no-brainer. A financially intelligent boss, however, would take a look at those assumptions and posit some alternatives, such as that Joe might actually lose an hour a day of work because it is now so easy for him to surf the Web and download music.

It’s amazing, in fact, how easily a financially knowledgeable manager can change the terms of discussion so that better decisions get made. When he worked for Ford Motor Company, Joe had an experience that underlined just that lesson. He and several other finance folks were presenting financial results to a senior marketing director. After they sat down, the director looked straight at them and said, “Before I open these finance reports, I need to know…for how long and at what temperature?” Joe and the others had no idea what he was talking about. Then the light went on and Joe replied, “Yes, sir, they were in for two hours at 350°.” The director said, “OK, now that I know how long you cooked ’em, let’s begin.” He was telling the finance people that he knew there were assumptions and estimates in the numbers and that he was going to ask questions. When he asked in the meeting how solid a given number was, the financial people were comfortable explaining where the number came from and the assumptions, if any, they had made. The director could then take the numbers and use them to make decisions he was comfortable with. Absent such knowledge, what happens? It’s simple: the people from accounting and finance control the decisions. We use the word control because when decisions are made based on numbers, and when the numbers are based on accountants’ assumptions and estimates, then the accountants and finance folks have effective control (even if they aren’t trying to control anything). That’s why you need to know what questions to ask.

The Ability to Form Relationships With Finance
From a purely functional perspective, there might never be a reason for HR and finance to form close relationships. Their functions are so different. But that is exactly the point. Imagine what might be different if finance and HR worked together during the budgeting process, instead of at cross-purposes. Imagine how layoffs might be handled if finance and HR collaborated, rather than finance letting HR know at the last minute what had been decided. To develop those relationships, says Connie Haney, vice president of compensation and benefits at Mentor Graphics Corporation, “you have to be able to talk the talk of the business.” Haney is in human resources, but she has hired people with a finance or economics background because everyone in compensation must speak the language of finance.

The Ability to Use Numbers and Financial Tools to Make and Analyze Decisions
What is the ROI of that project? Why can’t we spend money when our company is profitable? Why do I have to (and how can I) focus on accounts receivable when I am in HR, not the accounting department? You ask yourself these and other questions every day (or someone else asks them—and assumes you know the answers!). You are expected to use financial knowledge to make decisions, to direct your subordinates, and to plan the future of your department. We will show you how to do that, give you examples, and discuss what to do with the results. In the process, we’ll try to use as little financial jargon as possible.

For example, let’s look at why the finance department might tell you not to spend any money, even though the company is profitable.

We’ll start with the basic fact that cash and profit are different. In chapter 15 we’ll explain why, but right now let’s just focus on the basics. Profit is based on revenue. Revenue, remember, is recognized when a product or service is delivered, not when the bill is paid. So the top line of the income statement, the line from which we subtract expenses to determine profit, is often no more than a promise. Customers have not paid yet, so the revenue number does not reflect real money and neither does the profit line at the bottom. If everything goes well, the company will eventually collect its receivables and have cash corresponding to that profit. In the meantime, it doesn’t.

Now suppose you’re working for a fast-growing business-services company. The company is selling a lot of services at a good price, so its revenues and profits are high. HR is busy helping the company hire people as fast as possible, and of course, those people have to be paid as soon as they come on board. But all the profit that these people are earning won’t turn into cash until thirty days or maybe sixty days after it is billed out. That’s one reason why even the CFO of a highly profitable company may sometimes ask you not to spend any money right now because cash is tight.


Cash as presented on the balance sheet means the money a company has in the bank, plus anything else (like stocks and bonds) that can readily be turned into cash. Really, it is that simple. Later we will discuss measures of cash flow. For now, just know that when companies talk about cash, it really is the cold, hard stuff.

Although this book focuses on increasing your financial intelligence in business, you can also apply what you learn in your personal life. Consider your decisions to purchase a house, a car, or a boat. The knowledge you’ll gain can apply to those decisions as well. Or consider how you plan for the future and decide how to invest. This book is not about investing, but it is about understanding company financials, which will help you analyze possible investment opportunities.

How It Benefits a Company 

We are the owners of an organization call the Business Literacy Institute. Our job is to teach financial literacy, thereby (we hope) increasing the financial intelligence of the leaders, managers, and employees who are our students. So naturally, we think it’s an important subject for our students to learn. But what we have also seen in our work is how much financial literacy benefits companies. Again, here is a short list of advantages.

Strength and Balance Throughout the Organization
Do the finance folks dominate decisions? They shouldn’t. The strength of their department should be balanced by the strength of human resources, of operations, of marketing, of customer service, of information technology, and so on. If the managers of HR and those other departments are not financially savvy, if they don’t understand how financial results are measured and how to use those results to critically evaluate the company, then accounting and finance have the upper hand. The bias they inject into the numbers affects and can even determine decision making.

Better Decisions
Managers routinely incorporate what they know about the marketplace, the competition, the customers, and so on into their decisions. When they also incorporate financial analysis, their decisions are better. Yes, HR is in a support position—but it can help the department or unit it is supporting make better decisions. When you are participating in meetings, discussing plans, or working through issues with the manager you support, your ideas and advice are going to be better if you understand the financials of that unit or department. We are not big believers in making decisions based solely on the numbers. But we do think that ignoring what the numbers tell you is pretty silly. Good financial analysis gives managers a window into the future and helps them make smarter, more informed choices.

Greater Alignment
Imagine the power in your organization if everyone understood the financial side of the business. Everyone might actually work in alignment with the strategy and goals. Everyone might work as a team to achieve healthy profitability and cash flow. Everyone might communicate in the language of business instead of jockeying for position through office politics. Wow. HR could have two roles to play here. One is to encourage its own staff to understand finance so that they, too, are aligned. The other is to help create such an alignment for everybody else through training, organizational development, and the other tools of the field. What an opportunity for HR to support the strategy of the company!

Roadblocks to Financial Savvy

We have worked with enough people and companies to know that while the results everyone wants might be great, they aren’t so easy to attain. In fact, we run into several predictable obstacles, both personal and organizational.

One obstacle might be that you hate math, fear math, and don’t want to do math. Well, join the club. It might surprise you to know that, for the most part, finance involves addition and subtraction. When finance people get really fancy, they multiply and divide. So have no fear: the math is easy. (And calculators are cheap.) You don’t need to be a rocket scientist to be financially intelligent.

A second possible obstacle: the accounting and finance departments hold on tightly to all the information. Are your finance folks stuck in the old approach to their field—keepers and controllers of the numbers, reluctant participants in the communication process? Are they focused on control and compliance? If so, that means you may have a difficult time getting access to data. HR and finance have traditionally not had close relationships, except perhaps in matters of compensation—and even there, the relationship was probably not one of open communication and sharing. But you can still use what you learn to talk about the numbers at your management meetings. You can use the tools to help you make a decision or to ask questions about the assumptions and estimates behind the numbers. In fact, you’ll probably surprise and maybe delight your accountants and finance people. And who knows? Those relationships might start to develop. We would love to see it happen (please let us know).

A third possibility is that your boss doesn’t want you to question the numbers. If that’s the case, he himself may not be comfortable with financials. He probably doesn’t know about the assumptions, estimates, and resulting bias. Your boss is a victim of the numbers! Our advice is to keep going; eventually, bosses usually see the benefit to themselves, their departments, and their companies. You can help them along. The more people who do so, the more financially intelligent the entire organization will be. You can also begin to take some risks. Your financial knowledge will give you newfound power, and you can ask some probing questions. Asking questions, as PBS Kids tells our children, is a good way to find things out.

A fourth possibility: you don’t have time. Just give us enough time to read this book. If you fly for business, take it with you on a trip or two. In just a few hours, you will become a lot more knowledgeable about finance. Alternatively, keep it somewhere handy. The chapters are deliberately short, and you can read one whenever you have a few spare moments. Incidentally, we’ve included some stories about the fancy financial shenanigans pulled by some of the corporate villains in the late 1990s, just to make it a little more entertaining—and to show you how slippery some of these slopes can be. We don’t mean to imply that every company is like them; on the contrary, most are doing their best to present a fair and honest picture of their performance. But it’s always fun to read about the bad guys.

If you can overcome these obstacles, you will have a healthy appreciation of the art of finance, and you will increase your financial intelligence. You won’t magically acquire an MBA in finance, but you will become more of a businessperson, more an appreciative consumer of the numbers, someone who’s capable of understanding and assessing what the financial folks are showing you and asking them appropriate questions. The numbers will no longer scare you.

It won’t take long, it’s relatively painless, and it will mean a lot to your career. Let’s begin.

  1. Andrew Ross Sorkin, “Back to School, But This One Is for Corporate Officials,” New York Times, September 3, 2002.
  2. Mike France, “Why Bernie Before Kenny-Boy?” BusinessWeek, March 15, 2004, 37.

This is an excerpt from Financial Intelligence for HR Managers: A Manager’s Guide to Knowing What the Numbers Really Mean by Karen Berman, Joe Knight, and John Case, published by Harvard Business School Press, January 2008. Copyright 2008 Business Literacy Institute. All rights reserved.


“In issues related to HR, you have to make judgment calls every day.”

“As an HR manager, you should strive to understand the assumptions behind the numbers…”

“This book is also different from other numbers-oriented books aimed at HR.”

“The fact is, business will always be a game of numbers, and the real players are the people who understand what the numbers mean.”

“Imagine what might be different if finance and HR worked together during the budgeting process, instead of at cross-purposes.”

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