5 Reasons Why Every Leader Must Master Financial Fundamentals

Understanding the financial underpinnings of a business isn't just about crunching numbers; it's about gaining insights into the economic backbone that sustains companies. Professors Matti Suominen and Petri Jylhä and Senior University Lecturer David Derichs explain why mastering core financial concepts is indispensable for each leader.

Aalto MBA participants in a workshop in 2023. Photo: Otso Alasko

Annamari Typpö, 29.04.2024

Starting to improve their financial literacy can feel overwhelming for many leaders, especially those whose expertise lies outside the financial domain.

However, the ability to "learn the numbers" is a pivotal skill set that can transform the way managers operate, make decisions, and ultimately, lead.

"Every leader needs to understand where value comes from and which types of business or investments create value and which destroy it," says Professor of Finance Matti Suominen from Aalto University.

Why becoming proficient in profit margins, debt-to-equity ratios, discounted cash flows and the like is not just necessary but can also be an engaging and enlightening part of a leader’s professional development? Continue reading!
 

1. Learn to decode the DNA of business operations

Just as DNA determines several characteristics and functioning of an organism, sfinancial metrics and ratios largely offer insights into a company's health and prospects. These indicators highlight operational strengths, growth areas, and weaknesses.

Senior University Lecturer David Derichs from Aalto University points out that every leader needs foundational knowledge in financial management to link operational measures and goals to financial and strategic objectives.

This knowledge
enhances leaders' capability to meet organizational expectations."

"This knowledge enhances their capability to meet organizational expectations and empowers them to better understand how their decisions impact the company’s financial performance, fostering a more financially aware culture within the organization," Derichs says.

For leaders, financial literacy means reading beyond the numbers to grasp their impact on the company's strategy and market position, enabling informed decision-making and the anticipation of challenges and opportunities.

 

2. Elevate strategic conversations

The ability to navigate financial statements and ratios empowers managers to engage in more strategic discussions with key stakeholders, including CFOs.

"The CFO and the finance department often act as gatekeepers within an organization. They wield significant influence, and understanding their perspective can lead to more effective collaboration and results," says Associate Professor of Finance Petri Jylhä from Aalto University.

Understanding the finance department's perspective can lead to more effective collaboration and results."

Financial literacy allows for detailed evaluations of key financial decisions, including investment opportunities and budget planning, and links financial outcomes to practical business strategies, helping assess the viability and sustainability of investments.

This turns leaders into valuable strategic contributors, shaping their company's direction.
 

3. Cultivate your business acumen

When leaders are conversant in the inner workings of finance, they can effectively communicate with teams across all departments, aligning strategies with the company's financial well-being.

This breaks down silos, promoting a unified strategy where pursuing financial stability is everyone's duty.

A good grasp of financial data enhances a manager's ability to communicate complex information."

Financial literacy also allows leaders to effectively interact with various industry stakeholders, aiding adaptation and innovation. It helps in assessing new investments or the financial outcomes of marketing campaigns, ensuring decisions are both innovative and financially sound.

"A good grasp of financial data enhances a manager's ability to communicate complex information succinctly and effectively, building trust with investors and owners, motivating employees by linking their efforts to the company's financial objectives, and reassuring customers of the company's stability", adds Derichs.
 

4. Steer with precision

A leader’s proficiency in leveraging financial outcomes is pivotal for effectively leading their area.

This ensures that every decision, from minor adjustments to major strategic shifts, is rooted in solid financial reasoning.

"There's solid academic research backing the effectiveness of data-driven management. Moreover, working through these financial calculations fosters a shared vision and consensus on goals and benchmarks, which is invaluable for any team," says Suominen.

There's solid academic research backing the effectiveness of data-driven management."

However, the real challenge lies in motivating the broader team to perform in alignment with these financial objectives.

Leaders must translate these high-level financial goals into operational actions that resonate with all employees, making the financial success of the company a shared mission.

This involves educating the team on how their day-to-day activities impact the organization's financial health and creating a culture where cost-saving and revenue generation are part of everyone's responsibilities.

Leaders must be adept at conducting cost-benefit analyses, interpreting financial metrics, and developing forecasts that guide strategic decisions, while also communicating the “why” behind these decisions to ensure team buy-in.
 

5. Boost your career trajectory

For ambitious professionals eyeing the zenith of their career ladder, proficiency in financial fundamentals is not just an asset – it's a necessity.

"Leadership is not about numbers or managing by numbers, but understanding financial numbers makes you a better leader,” says Jylhä.

Thus, embedding financial literacy into one's personal development blueprint is a strategic move that can unlock senior leadership roles and open new avenues for influence and impact.

Understanding financial numbers makes you a better leader."

As the business landscape continues to evolve, so too do the financial competencies required to navigate it.

The future beckons managers to not only be adept in traditional financial metrics but also to embrace data analytics, sustainability, and digital innovation.

The best MBA programs are at the forefront of this evolution, crafting curricula that blend timeless financial wisdom with cutting-edge trends, ensuring that tomorrow's leaders are well-equipped for the challenges and opportunities that lie ahead.

 

The Aalto MBA programs are generalist in nature, covering all key areas of business. They provide growth opportunities for leaders with in-depth financial expertise as well as for leaders who do not yet have such substance knowledge. The program diplomas are granted by the Aalto University School of Business. Read more here

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