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Several years ago, I read and reviewed Finance for Managers, one of the volumes in the Harvard Business Essentials series. The material provided in it is drawn from a variety of sources which include William J. Bruns, Jr., Michael J. Roberts, and Robert S. Kaplan as well as Harvard Business School Publishing and Harvard ManageMentor®, an online service. Samuel L. Hayes served as subject advisor to Richard Luecke, author of this and other books in the Harvard Business School Essentials Series as well as more than 30 other books in the series as well as several dozen articles. What we have in Financial Intelligence for Entrepreneurs, co-authored by Karen Berman and Joe Knight with John Case (also author of Open-Book Management and The Open-Book Experience), are information and advice that respond directly to the needs of those who are planning to launch a new company or have only recently done so. I think the material will also be of substantial benefit to decision-makers in companies that seek to become more entrepreneurial.
At a GE annual meeting, then CEO Jack Welch explained why he thought so highly of "small, sleek" business operations: "For one, they communicate better. Without the din and prattle of bureaucracy, people listen as well as talk; and since there are fewer of them they generally know and understand each other. Second, small companies move faster. They know the penalties for hesitation in the marketplace. Third, in small companies, with fewer layers and less camouflage, the leaders show up very clearly on the screen. Their performance and its impact are clear to everyone. And, finally, smaller companies waste less. They spend less time in endless reviews and approvals and politics and paper drills. They have fewer people; therefore they can only do the important things. Their people are free to direct their energy and attention toward the marketplace rather than fighting bureaucracy." This seems to have served as a model for "bowing up" of GE after Welch became its CEO in 1981. At that time, its market value was $14 billion; twenty-three years later, it was more than $410 billion.
I share all this by way of creating a frame-of-reference for what is provided in this volume, a new edition of a book first published (entitled Financial Intelligence) in 2006. Although the focus in this second edition is on entrepreneurs, the material provided will help all managers to develop the entrepreneurial mindset to which Welch refers, and, to acquire a highly-developed financial intelligence quotient (FIQ). Moreover, they can then do everything they possibly can to develop a high-level of FIQ among others at all levels and in all areas of their organization. In the Preface, Berman and Knight explain what their reader will learn:
1. How to read the three major financial statements (i.e. income, balance sheet, and cash flow) and how to interpret what they contain
2. How to calculate critical ratios and to understand what they reveal
3. Why net cash in a given time period is not the same as profit and why a company needs both profit and cash
4. How to use various return on investment (ROI) tools to analyze big purchases in order to make certain the investments add sufficient value to the business
5. How to manage working capital that helps to improve a company's cash flow and profitability even when there is no change in sales or expenses
6. How to use the three main methods for establishing the value of a business (i.e. the price-to-earnings ratio method, the discounted cash flow method, and the asset valuation method) "and many other tricks of the financial trade"
"Along the way, we'll let you in on the finance profession's little secret, which is that finance is as much art as it is science." Berman and Knight explain why understanding this "little secret" is so important to acquiring a high-level of financial intelligence.
They carefully organize their material within 30 chapters that are divided among eight sequential Parts: The Art of Finance (and Why It Matters), The (Many) Peculiarities of the Income Statement, The Balance Sheet Reveals the Most, Cash Is King, Ratios: Learning What the Numbers Are Really Telling You, How to Calculate and (Really) Understand Return on Investment, Applied Financial Intelligence: Working Capital Management, and Creating a Financially Intelli9gent Company. They also provide three appendices: Sample Financials, Exercises to Build Your Financial Intelligence - Income Statement; Balance Sheet; Cash Flow Statement; Ratios, and Under Armour and eBay Financial Statements. At the conclusion of each Part, there are contributions to the filling of the reader's "Toolbox."
Other reviewers will have their own reasons for admiring this book. Here are three of mine. First, this is not a "Finance for Dummies" although a financial novice will find nothing in it that is over her or his head. With consummate skill, Berman and Knight present and explain substance without compromising it. And when doing so, they prepare each reader to help others to increase their own FIQ by providing a model for those initiatives. In fact, Berman and Knight consider those efforts to be so important that they devote the final three chapters (Part Eight) to explaining how to create a financially intelligent company. I also appreciate this book because the authors immediately establish and then sustain a personal (rather than professorial) rapport with their reader. They use direct address throughout the narrative. For readers who are financial novices, they anticipate and address the concerns. For other readers with more developed FIQ (especially CFOs, comptrollers, office managers, and accountants) they offer a systematic review of material (e.g. nomenclature and core concepts of finance) that is already familiar to them. However, there is much to be said for reminders of what can sometimes be neglected or ignored. Finally, I appreciate the dozens of examples drawn from real-world situations that illustrate some of Berman and Knight's key points. This is especially appropriate, given the conversational (rather than professorial) tone that they sustain throughout the narrative.
One final point: All organizations have an urgent and constant need to reduce (if not eliminate) waste. Increasing the FIQ of as many workers as possible will enable them to recognize and, better yet, understand the bottom-line impact of waste and will thus be more likely to become not only involved but engaged in efforts to help their organization to reduce (if not eliminate) waste. If I were a CEO of a company, I would purchase a copy of this book for every line manager and make it required reading. And if my company has not already devised and then implemented an FIQ education program, to be implemented throughout the enterprise to varying degree, I would immediately appoint a cross-functional team of my best and brightest to do so.
I congratulate Karen Berman and Joe Knight together with John Case on a brilliant achievement. Bravo!