Is financial literacy your weakest link? Rectify that right now!

You might be able to stumble through your private life without financial literacy. But if you’re a business manager, it’s a must-have competency. So, if this is a gap in your skill set, fill it soon, advises Peter Hughes.

Giovanni Peluga had a small market stall in Venice. He knew how well he was doing by the cash in his pocket.

He was an ambitious man, and his best friend Luigi Constantine joined him. At the end of their first day’s trading together they had a meeting.

“How much did we make today, Giovanni?”

“Two thousand florins, Luigi.” “A thousand each, then.”

“Not quite. I paid for those two hams we haven’t sold. I gave Signor Capella 50 florins each for them.”

“Fine, so we need a small adjustment then. Give me 850.”

“Wait a minute. You know those cheeses I sold to Signora Rosa? She hasn’t paid for them yet. She’ll give me 90 florins tomorrow.”

“I see. But did you pay Signor Grimaldi for them?”

“Only 40 florins. On account. We still owe him another 20. And Signora Blanca brought back that loaf from yesterday. It had gone a little mouldy on the inside. I gave her a fresh one to replace it.”

“So, Giovanni, how much money did we make?”

“I don’t know, Luigi, but I heard about this book that explains it all. It’s by a man called Luca Pacioli.”

Philip Ramsden relates this conversation in Finance for Nonfinancial Managers, one of the titles in the ‘Teach Yourself’ book series.

The book illustrates the complexity of keeping track of day-to-day transactions and why modern society cannot operate without accounting and accountants.

In 1495, Pacioli, a Franciscan monk, documented the methods used by some merchants in Venice to keep track of what was happening in their small businesses.

Remarkably, the system and documents we use today still follow the fundamental principles that Pacioli described. Moreover, the same principles, disciplines and processes are used all over the world.

AS YOUR LEVEL OF FINANCIAL LITERACY GROWS, YOU’LL FIND THE SUBJECT FASCINATING

While basic education focuses on reading, writing and arithmetic, it‘s an indictment of educators that they have never recognised the need for everyone to have a basic level of economic and financial literacy.

And while financial literacy is important in our private lives, it’s a nonnegotiable skill for anyone aspiring to become an effective manager in business.

SCORECARDS

The crucial ‘scorecards’ in business are the management accounts and financial statements (balance sheet, income and cash flow statements), which track the cash flow and balances (values) of the business.

They highlight areas where problems are arising, so that corrective action can be taken before small problems become big ones.

Not being able to understand these ‘scorecards’ is like a cricket match with a coach and captain who don’t know how to read the scoreboard. You cannot run your life or any part of a business like this and expect to make a success of it.

Don’t get me wrong; this doesn’t mean you need to become an accountant.

Far from it. It means you need to have a basic understanding of financial terms and concepts to be able to participate in discussions on financial matters, and understand their relevance to the organisation.

As with learning any new language, there are no short cuts, but it’s not as daunting as it may seem. The Oxford Dictionary of Accounting lists a total of 4 000 words, but you’ll never hear or need to understand more than 80 of them.

There is no shortage of material to make a start. Reading Ramsden’s book or something similar is an excellent way. An Internet search for ‘important accounting terms’ delivers a selection of the essential terms and concepts.

SHORT COURSES

Leading universities and financial institutions in South Africa offer ‘Finance for Non-Financial Managers’ short courses. There are also a number of good online options.

Accounting is regarded as one of life’s most boring subjects, and accountants are often seen as lacking spontaneity and humour. It’s a myth.

Like me, as your level of financial literacy grows, you’ll find the subject more and more fascinating, and you’ll get to know many accountants who contradict the stereotype completely!

Start working on your financial literacy today, and a whole new world will open up for you. It will set you on a path to better personal and business financial management, and greater success!