- Definition of Financial Acumen
- Definition of Commercial Acumen
- Example of Financial Acumen
- Example of Commercial Acumen
Acumen – the ability to make good judgments and effective decisions – has become something of a buzzword among directors and learning and development professionals lately. But what does it actually mean in the context of financial and commercial decision making? And, why is it important to know the difference between the two types of acumen knowledge. We’ve taken a look at both meanings, how they relate to one another and what success looks like in both terms.
Simply put, a person with financial acumen is able to evaluate the impact of a business decision on the business’ financial statements, and financial wellbeing in the long term. Whereas, an employee with commercial acumen can go beyond this; it enables them to make sure an outcome delivers the most benefit to all aspects of their business, this includes evaluating and balancing the impact of other factors, such as people, processes, and strategy. It is important to remember that every decision an employee makes has an impact on the financial health of an organisation, so let’s explore both in more depth.
What is Financial Acumen?
Someone with strong financial acumen should be able to evaluate the impact of a business decision – whether it be investment in a new product, new technology or a rethink of an existing business process – and answer the question: do the numbers stack up in favour of this idea?
Behind this ability lies a number of considerations; this person would need to understand financial terminology, be able to analyse financial statements (such as profit & loss, balance sheets and cash flow statements), create and interpret financial projections (such as budgets and forecasts) and understand the principles behind financing a project.
If the employee understands all of these, they should in turn understand how certain business decisions can impact the financial success of a business.
When we define “financial success”, this is not simply a case of “what makes the most money”. There is a lot more to financial wellbeing than simply profit. All decisions will impact your business’ financial statements in at least two ways. Understanding how they affect other areas of finance in addition to profit is critical for making informed and robust choices.
For example, let’s say an employee is looking to invest in a new IT system for your organisation. Investment in a new technology could make your product or service more efficient and cost-effective to produce, but this big spend will increase the overall value of your long-term assets and, depending on how it’s funded, be potentially detrimental to cash flow. Consequently, if your cash flow statement and balance sheet are negatively impacted as a result of this investment, this affects how the financial health of your business is perceived from outside stakeholders. This may then have knock-on impacts with negotiating credit terms, accessing funding and attracting shareholders amongst other areas.
Does your team have financial acumen? Are there any topics where they might need some help? Try our free Learning Needs Analysis.
What is Commercial Acumen?
Commercial and financial acumen are often confused with one another, but commercial acumen in fact covers more breadth and requires an understanding of multiple business factors, not just finance. Someone with high commercial acumen is aware and considerate of how their roles impact the entire business, not just its financial statements.
Let’s revisit the example of when an employee is evaluating the impact of an investment in new IT software for their organisation. Aside from the financial impacts already noted, there will be consequences that will affect the business in a much wider way, including:
- Investing in technology usually means that processes become more efficient. More efficient processes results in less time being consumed on them, freeing up time for your people to work on more value-added projects. There may be a short-term increase in time required as staff transition from one system to another, but this should always be weighed up against the longer-term benefits.
- A change in technology should be linked in to business strategy, thus moving the business into the right direction to achieve its goals.
- The people within your organisation may initially feel a little reluctant to move to a new system. However, with the involvement of the right people in the design and development of it and high quality training and support provided, your teams will soon buy into the idea and feel positive about it. Seeing how the organisation that you work for is investing in IT that results in operational improvements can be a boost to staff morale.
- Improved IT infrastructure will often mean that you can improve the service you offer to your customers and if you can keep your customers happy, your customer retention rates are likely to be great.
- Depending on the purpose of the new IT infrastructure, it may be something that your marketing team can shout about in press releases and other marketing activities – all great for keeping customers bought into the value of using you as a supplier.
And of course, an extra factor that should be considered in all decisions is the customer. It sounds obvious but it isn’t always thought of enough during decision making in organisations. All of these points have a direct or indirect impact on the customer experience. And if the business decision doesn’t ultimately benefit the customer, then it’s worth questioning if the action is worthwhile.
So, to recap…
Someone with financial acumen can evaluate the impact of a business decision on the business’ financial statements, and financial wellbeing in the long term.
An employee with commercial acumen can go beyond this and ensure an outcome that delivers the most benefit to all aspects of their business, evaluating and balancing the impact of other factors including people, processes, and strategy.
It’s also worth noting that the terms ‘acumen’ and ‘success’ are subjective and not always about making the most money. Top level success for one organisation may be measured in a way that’s very different to another.
It is not enough to say: it’s good for our team and the numbers make sense”. There are consequences of every business decision for which you will need more than just financial acumen to evaluate. Employees with commercial acumen should be thinking about their roles and their decisions not just in the context of their teams, but in terms of the wider business and the customer experience. If the customer isn’t happy, the business isn’t going to do well, therefore it’s critical to apply this way of thinking in all decision making.
Thanks for reading! The topics discussed here are covered in more depth in our Commercial Acumen & Awareness Course – learn more here.