Learning Financial Accounting as a Second Language

During a Crisis, You Must Know the Lingo to Join the Convo

Early in my career, I was terrified of math (due to post-algebra traumatic stress suffered in high school) and so I didn’t even try to learn financial accounting. This became an increasingly big problem as I was promoted and sat in more meetings with more senior people.

During the coronavirus crisis, I’m reminded that, for many years, the more difficult the challenges my employer faced, the less I was able to contribute to the dialogue around solutions: Because I didn’t understand financial accounting, I didn’t understand what people were talking about.

Cash Flow in a Crisis

If you work at a distribution company negatively impacted by the coronavirus, you may hear your CEO or CFO say something like:

Working capital performance is going to be impacted in a couple of ways, but hopefully our lower cost of capital will offset some of that.

Translation? Let’s take it in two parts:

1. Working capital performance is going to be impacted in a couple of ways…

Working capital for distributors is mostly affected by cash on hand, inventory, accounts receivable and accounts payable. In other words, your on-hand stock and cash plus how much money your customers owe you, minus how much you owe your suppliers. In a crisis like the coronavirus, sales typically drop off, leaving you with more inventory than you really need. Inventory on hand comes out of available cash, so when demand drops off sharply, distributors can run short on money. This is bad.

2. …but hopefully our lower cost of capital will offset some of that.

Cost of capital can refer to more than one financing source, but to keep it simple, I’ll refer to interest rates on loans, which can apply to every distributor. The US Federal Reserve is sort of the grandpappy of all banks and has mechanisms to affect the “cost of money” – the interest rates businesses pay banks when borrowing money. The Fed does this by raising or lowering the interest rate it charges banks to loan them money.

The Fed has dramatically lowered interest rates, and this had made borrowing money much cheaper for all businesses, including distributors. This is what our CFO means by a “lower cost of capital.”

That sounds good, of course, but what if you don’t need to borrow more money? You can still win because companies will often refinance existing debt when interest rates decline, meaning their monthly loan payments go down significantly.

So, your CFO is saying that – on the one hand – our cash flow is going to be negatively impacted because we won’t be selling inventory at the same rate and our customers might take longer to pay us. On the other hand, we can lower our costs by refinancing existing debt, and if we need to borrow more money, we can do it very inexpensively right now. Hopefully, the two will balance out.

This sounds simple once you read the explanation. But if you don’t know the terminology, you can’t contribute to the discussion.

“The language of business is marketing,” said no one, ever.

You may have heard that “the language of business is finance.” I certainly did when I was early in my career, and I was terrified to think it may be true. But as I climbed the ladder from part-time truck unloader to the vice president of marketing at Grainger (true story), it became increasingly obvious that if I wanted to participate fully in senior executive conversations about strategic and operational concerns, I needed to learn finance.

If this seems unfair, then buck up, buttercup. Businesses exist to make money, and financial accounting is how you keep score. So I set out with grim determination to close this knowledge gap and – much to my surprise – was accepted into business school at Northwestern University despite my atrocious math scores in high school.

I was hoping to ease back into school, not to mention math. Maybe take something easy, gain some momentum and prepare to tackle my demon. Unfortunately for me, the executive program I was in had a fixed schedule, and we all started out with the same class: Financial accounting.

Great, I thought. I finally get into my dream school, and I’m going to flunk out in the first class.

A New Lys on My Executive Life: Dr. Thomas Lys, That Is

Our class was taught by Dr. Lys (pronounced, “lease”) and on the first day, he handed out a form to ask about each student’s math skills. I wrote:

“I am the worst math student you will ever teach in your career.”

Dr. Lys turned out to be an extraordinarily gifted instructor. In addition, I was in a great study group with the controller from a large bank who became a dear friend of mine. His name was Pete Sesterhenn, whom we unfortunately lost to cancer several years ago, but I know he left a strong personal and professional legacy; he forever altered the arc of my career.

Dr. Lys provided a terrific academic foundation to learn the subject, and Pete tutored the rest of us in his gentle, encouraging and thoughtful style. Instead of making me feel like a fool (which would have been easy to do and was probably tough to avoid), the two of them carefully showed me the ins and outs of financial accounting. I felt like I understood it – at least a little bit.

Our take-home final required us to evaluate the financials of General Motors and answer some high-level questions about the firm. On our last day in class, I got my test back and as Dr. Lys handed it to me, he said:

“I thought you said you would be the ‘worst math student’ I’d ever taught in my career.”

I couldn’t believe he’d remembered that.

“I am,” I replied.

“Well,” he said, “You earned an A on my final and a B in my class. I’ve had many students do worse than that.”

“Thanks,” I told him. “But you said the take-home final should take four hours, and it took me 12.”

He looked at me and grinned.

“I see the problem,” he said. “You think you’re bad at math because it’s hard for you to do the calculations, right?”

“Yes.”

He shook his head.

Ian, throughout your career, there will always be people around you to do the calculations. Your job will be knowing which calculations to do and what do the answers mean.

In the rest of your education here at Kellogg, give yourself a break. Accept that the calculations are hard so just focus on learning the concepts behind the math.

Becoming a Financially Astute Executive

This dramatically boosted my career. By following Dr. Lys’s advice, I became proficient at applying statistical, financial and accounting models of various kinds and more. And he was right: Someone was always around who could do the calculations. But I knew which math to use when and what the outcomes meant.

Oddly, as I became more comfortable with the concepts, I unexpectedly became much better at doing the calculations. And one day, something occurred to me that you should know, too:

Almost all financial accounting is nothing but multiplication, division, addition and subtraction.

No algebra, calculus, geometry or even statistics. You don’t really need to learn any of that to master the math required to achieve a reasonable level of fluency in finance – the language of business.

Because so many people are working from home right now, perhaps it’s a good time to put the commuting hours you’ve gained back to good use. If your “finance as a second language” skills could use some improvement, consider enrolling in an online course in financial accounting. They’re available from countless sources, and with the confidence you’ve gained by learning that the underlying math is all arithmetic, I bet you’ll enjoy it a lot more than you think.

The pandemic is a serious problem – as is the financial crisis it’s created. Maybe the best way to get a great return on your investments right now has nothing to do with the stock market. Instead, take care of yourself. Be sure to self-distance and learn something that will help you everyday in your career.