Cash vs. profit: 50% of execs, managers don’t know difference

 Excerpted from the Executive Report: What Non-Finance Managers Need to Know About Finance.

How business savvy are you and your managers? You might be surprised by how little many execs and managers know about the finance aspects of their business.

In a recent Harvard Business Review survey, a representative sample of 300 managers, from C-level execs to supervisors, did poorly on a financial literacy exam that was included.

The average score: 38%.

• More than 50% couldn’t describe the difference between “cash” and “profit.”
• Many couldn’t distinguish a balance sheet from an income statement.

Decisions made by managers who lack even basic business knowledge can put any company at risk.

It’s also the kind of knowledge shortfall many managers are reluctant to admit, or to seek help for.

Here are just two of the questions managers on the exam.

1. A company has more cash today when …

  a. All customers pay their bills sooner
  b. Accounts Receivable increases
  c. Retained earnings increases
  d. Profit increases

 

2. You should be pleased about your company’s financial status if …

  a. There is an increasing trend in Cost of Goods Sold (COGS)
  b. Cash flow is coming from company investing
  c. Cash flow is coming from company operations
  d. There is a negative trend in operating margin

 

So, how did you do? The answers: 1. a; 2. c

DIGGING DEEPER
Understanding the finance side of business is important. At the very least, execs and managers should know what the common finance terms of business are. To get a better understanding, read the Executive Report: What Non-Finance Managers Need to Know About Finance.

Comments

[jw]

I don't agree with the answer to the 2nd question; Increase in cash flow from operions means current operating costs (cogs)are lower which usually indicates less current business & revenue; lulls in business volume is not necessarily bad as long as it is short term/cyclical It allows you to accumulate cash for the next up swing in business & borrow less. 10% annual growth with 90 days between expenses and a/r payments results in perpetual neg cash flow...without the lulls