All too often, a company’s finance department is shrouded in mystery. Many employees are unable to explain what the department is, what it does, or how it impacts the work they do. But the truth is, finance affects each and every person. Finance communicates the overall health of an organization, explains how an individual’s actions impact the company’s success, creates guidelines for future goals and initiatives, and sets meaningful metrics to determine performance across departments. It’s clear that taking the time to develop your financial skills can benefit you in many ways. Below are six key benefits you can realize by gaining a deeper understanding of finance, alongside three actionable tips you can use to build those skills.
BENEFITS OF UNDERSTANDING FINANCE
1. Learn How to Analyze Performance for Your Department
Financial understanding will give you the tools needed to gauge how well your department is performing, both by itself and as part of the greater company—key insights for anyone in a managerial role. It will help you determine the answers to questions like: Is your department performing well? Who should your department be compared against? What measures and metrics should you use to evaluate and monitor your department’s performance?
Many companies choose the wrong metrics to benchmark and monitor performance, or use the same metric for every department and, in doing so, miss the unique ways in which each department contributes to corporate profits. A company that measures performance strictly in terms of increased revenue targets, for example, may underestimate or entirely miss the costs of increasing those targets—even as they grow higher than the increase in revenue—or undervalue key employees who provide value and impact revenue in indirect ways.
Once you understand the metrics that matter most to your department, and which appropriately measure your contributions to the company’s finances, you can establish a plan for monitoring them. Armed with this data, it becomes possible to more accurately measure your department’s contributions and identify areas for ongoing improvement.
2. Appreciate the Financial Impact of Your Job
On a more granular level, developing your financial skills will help you understand how the work you perform specifically contributes to the financial health of your company—information you may be able to leverage to negotiate a raise, promotion, or increase in other benefits. Just as every department within a company should provide value to the bottom line, so, too, should every individual position or role. The challenging part of the equation is often in determining how this value can be monitored on an individual level.
It’s easy, for example, to understand the impact an individual member of the sales team has on revenue goals, because their performance is tied to the amount of revenue they contribute—whether or not they’re hitting their quotas. But how do you measure the value contributed by the IT or accounting departments, which perform important duties, but don’t directly interact with customers? Every individual makes a measurable impact on the success of the company, and understanding the impact of your job, using the tools of finance, can be the best first step to reaching a higher level of performance.
3. Interact Better With Your Company’s Finance Department
Have you or someone in your department ever wanted to pursue an exciting project, only to grumble when the idea is ultimately shot down by the finance team? Have you ever wanted to propose an idea or project, but decided against doing so because you didn’t think there would be any chance of getting approval for funding?
All too often, this is the perception that individuals within an organization have about their finance department: That it’s a group primarily designed to say “no” to promising ideas. But that perception is far from the truth. One of the primary duties of finance is to determine which projects show the most promise for a positive return on investment, and to prioritize those over projects which would contribute less effectively to the company’s strategic goals. Coming to this determination requires a lot of data and deliberation; decisions are never simply made on a whim.
Equipped with the language of finance and an understanding of the factors the finance department must consider as they evaluate potential projects, it’s possible for you to more effectively communicate and collaborate with them and generate opportunities that add value to your organization.
4. Unlock the True Sources of Value Creation
Have you ever been assigned to work on a project with questionable ROI? There’s no doubt that it’s a demoralizing experience to invest your time, energy, and resources over and over again into initiatives that, at best, have no effect on your company’s strategic goals and, at worst, have a negative impact. To be effective in your role, it helps to understand how value is created for your business. How do your organization’s key stakeholders—members of the C-suite, investors, the general public—measure value and success?
Finance gives you the knowledge and skills to answer this question and ensure every project you take on will directly and meaningfully contribute to the success of your company. It empowers you to push back against projects that show little chance of success, or offer suggestions that might help pivot a project in a more promising direction—ultimately helping you demonstrate your unique value as a strategic thinker.
5. Know That Actions Tell Stories
Everything you or your company does tells a story that will be interpreted by someone else. What story are you telling? Are you accidentally sending a signal to investors that hard times are coming? Or are you intentionally ensuring your actions line up with your words and paint an accurate picture of the future of your company? In a world where investors must guess about what goes on inside a company, everything is analyzed. Are you sending the right messages? By understanding how various financial data and signals might be interpreted by different audiences, you can shape the narrative of the story in a way that would not be possible if you simply allowed the data to speak for itself.
6. Understand Investing and Capital Markets
Business aside, everyone interacts with capital markets in their daily lives, whether they realize it or not. For example, your retirement fund is likely invested in a pension plan. Your personal investment portfolio is likely managed through a broker, or packaged into a mutual fund. And, of course, the interest rates on everything from your mortgage to your credit card are impacted by the actions of the Federal Reserve, which often takes its cues from larger economic trends.
A solid foundation in financial knowledge can help you navigate the tricky questions that are often related to these considerations. For example, it might enable you to better judge whether an investment opportunity makes sense for your financial goals—whether that be growth, safety, or a mix of both. At the same time, and equally as important, it can show you what people are looking for in terms of investments and how your actions can help to give it to them.