Original article at http://www.shrm.org/hrmagazine/articles/0406/0406books.asp, originally published in HR Magazine (link only available to SHRM members).
Financial Intelligence
By Karen Berman and Joe Knight with John Case, Harvard Business School Press, 2006
List price: $24.95, 288 pages, ISBN: 1-59139-764-2
Hate math? Do you cringe at the thought that “financial intelligence” means suffering through Accounting 101 when all you want to do is get on with running your project or department?
Authors Karen Berman and Joe Knight don’t want to turn managers into accountants; they just want managers at all levels to become financially literate. This book is, in their words, “a manager’s guide to knowing what the numbers really mean.”
Berman and Knight, co-owners of the Business Literacy Institute, say that readers who finish Financial Intelligence will understand that many of the figures they see from the finance department are estimates, and estimates can be questioned. Much of finance is art as well as craft, they say; estimates and analyses are applied to numbers and affect conclusions about them, and managers who understand this are already on the way to more-confident interactions with finance.
The book’s short chapters are peppered with pithy definitions of financial terms in easy-to-find boxes. Berman and Knight teach readers to interpret an income statement, a balance sheet and a cash flow statement—and how to spot critical differences between these documents.
Financial Intelligence explains costs of goods sold and costs of services, looks at operating expenses, and shows how depreciation and amortization are powerful (and often unrecognized) expenses that can affect businesses profoundly.
A chapter on profit’s many forms reveals how choices about when to claim revenue or what to include as costs affect profit. The book covers types of assets and liabilities, explains owner’s equity—what’s left after you subtract liabilities from assets—and shows “why the balance sheet balances.”
Berman and Knight give special attention to cash because managers tend to ignore it. But managers affect cash in many ways, from sales managers who get customers to pay bills on time, to plant managers who order extra equipment just to have it on hand “in case,” to credit managers who give credit too easily or who withhold it too readily.
The book demystifies ratios—the relationship of one number to another—and the power of ratios to uncover numbers’ real meanings. Knowing how to use ratios can reveal trends like whether profit relative to sales is up or down and whether your company can meet its payroll.
A section on return on investment (ROI) teaches readers to calculate ROI three ways and includes a brief guide for preparing a proposal—for a new piece of equipment, a new marketing campaign, or any expenditure—that shows ROI in clear steps. The book also looks at the impact managers have on inventory and the role they play in collecting customers’ cash.
