For over 20 years, I have delivered Finance training to a wide variety of clients. These clients range from SMEs to large multinationals. The participants on these courses can have a wide range of Non-Financial backgrounds such as Engineering, Sales, Marketing, R+D etc.
Each course is tailored to the specific requirements of the client. So, for example, a course for Sales professionals would focus on topics such as margin and working capital whereas a course for Engineers might focus more on topics like Assets, Impairment and Return on Investment.
Every time I deliver one of these programmes I become more and more amazed at how poorly finance topics are understood by non-Finance people.
I often use the following example to get discussions going on the first morning of the course:
Let’s take a simple shop that sells one type of product. At the beginning of January, the shop owners purchase 200 units of this product from their supplier. They pay the supplier $10 per unit. During the month of January, the shop owners sell 150 units of the product to customers, charging customers $20 per unit.
When I ask participants to calculate the profit reported by the shop in January, I am always amazed with how few correct answers I get. The vast majority of non-Finance people believe the answer to be $1000. (The correct answer, of course, is $1500)
Even though this is a simple example, if course participants do not understand why the answer is $1500, then they cannot understand the “matching principle” and, consequently, never hope to understand topics such as depreciation, impairment etc. and definitely will never understand a P+L.
Following this example, I move the goalposts slightly for the second example. Assuming the quantities purchased from the supplier and sold to customers remain the same, and leaving the purchase and selling prices the same, I add the following information.
Suppose the shop owners do not pay the suppliers for 90 days after receiving the products and also suppose that the customers don’t pay the shop owners for 60 days after purchasing the products, again I ask what, in these new circumstances, is the profit.
Again I get a wide variety of responses, the most popular being zero profit!!
The correct answer, of course, again is $1500. But for course participants who do not understand why this is, it will be impossible to understand concepts such as Working Capital Management and Cash-flow, and they will never understand the Balance Sheet.
However, on a positive note, once examples such as those above are understood by participants, by the end of day 1 they can read and compare P+Ls from different companies and by the end of day 2 they can understand Balance Sheets and Cash-Flow statements, as well as some Management Accounting topics.
So, in summary, Finance is a very simple concept, once you understand some very basic principles !!