Our Two Cents on Financial Literacy for MBA Students

If you were asked how many business executives and managers would pass a basic financial literacy test, what would be your guess? 100 percent? 90 percent? Surely not less than 75 percent?

Get ready to be surprised: According to the Business Literacy Institute, a mere 38 percent of leaders of large companies (150+ employees) had enough knowledge to pass such a test. Among entrepreneurs, the scores were even lower, with only 20 percent indicating that they have a fundamental knowledge of financial principles. Unfortunately, many business leaders operate under misconceptions (equating “profits” with “cash,” for instance) or suffer from a more general lack of fluency with financial concepts, and this can lead to skewed decision-making and serious financial issues within the company.¹

That’s why financial knowledge is a fundamental part of a strong business education—even for those who don’t work or plan to work directly in finance. Grasping the basic terminology and functions of finance is critical to guiding business strategy and operations.

Chances are that within the scope of your work, you analyze the data in spreadsheets or reports so you can identify strategic priorities and set goals. Or perhaps one of your responsibilities is to manage projects within budget constraints. To be successful, you must speak the language of money—using terms like revenue, cash flow, costs and overhead—and show the financial benefits of your decisions. As Harvard Business School professor Richard Ruback explains, “Finance is the way businesses keep score. It’s like counting balls and strikes in baseball … but instead you’re measuring progress through financial performance.”²

Taking courses in finance can prepare you to be more effective and efficient across many of your professional responsibilities. You could benefit by having:

• The ability to make better-informed decisions. Rather than acting on instinct, your decision-making can be strengthened with a basis in quantitative data and thoughtful consideration of the potential financial outcome for the company
• Improved risk management. Risk is inherent to any business decision. However, using the principles of finance can give you a better handle on the severity of potential risks your company may face, and the tools required to mitigate them
• Improved understanding of the company position. Knowing how to read three basic financial documents—the balance sheet, the income statement and the cash flow statement—will tell you where your company stands, as well as help you identify new opportunities to increase revenues
• Financial fluency. If nothing else, learning basic terminology and concepts allows you to speak the language of business, and understand and contribute to important strategic discussions, without misinterpretation

The good news is that most of these skills can be developed in a graduate-level finance course—and you don’t need to be a math whiz to understand them.

 
Most of the fundamental concepts you learn in an introductory finance course require little more than basic arithmetic. The functional knowledge you’ll build in a class like this is centered around application of those mathematical skills toward some standard types of documents, data and concepts that you’re likely to encounter in the business world. You’ll learn to: 
 
 
 

• Use basic terminology such as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), operating income and expenses, cash flow, profit margins, and ratios
• Read and interpret a balance sheet
• Understand key metrics and develop your own
• Evaluate opportunities from a financial standpoint to inform good decisions

Being financially savvy can give you the tools you need to evaluate your own value to the company, and to find ways to build on that value. With the right financial background, you can contribute meaningfully to decisions that could increase revenue and reduce costs—from establishing the financial priorities of your department or position to better aligning them and your daily tasks to the company’s key metrics and strategic goals. Understanding how your decisions and efforts affect the bottom line puts you in a position to potentially lead projects and take on more senior leadership roles.

And this knowledge is just as important if you intend to start your own venture as it is if you work for an established company. As an entrepreneur, lacking a basic knowledge of finance can lead to significant cash flow and budgetary problems in the fragile structure of a startup company—and it can even lead to your business’s failure. Simply understanding the basics and using that information to guide your decision-making can help you stand apart from your competition, which is integral to a stable and successful enterprise.

Even if you aren’t a “finance person,” the valuable training you receive in your MBA finance courses can improve your overall job performance, and the performance of your company. Learn how the California State University, Monterey Bay Online MBA can help you reach your career goals and make you a more valuable contributor in any business role.