Business Finance: the common language for success

For the untrained eye, business finance may look too theoretical and far away from business reality.

Business Finance: the common language for success

For the untrained eye, business finance may look too theoretical and far away from business reality. Some will say business is about consumers, about the product design, about the marketing strategy, you name it. None of which is (fully) wrong.

But when the role of business finance is understood, the following realization takes place: business finance tells a story of the company’s situation and its evolution. It is essential in understanding the organization’s performance and the sources thereof.

In this article, we will explore the fundamental role played by business finance, and how it should act as a common language for all stakeholders of the company.

We will also see how our business simulation helps non-financial professionals connect financial theory with business reality, and the impact of their decisions on their financial results.

Business finance is a common framework

Let’s get this straight: having decision-makers, at all management levels, understand how business finance works is a must. Not a nice to have.

Getting all decision-makers to speak the language of business finance will help organizations in three ways: it helps set a direction, foster stability, and become more relevant.

Starting with direction.

Strategy not only needs to inspire stakeholders, but also to be anchored in financial reality: how do we get there, given where we are today.

If a strategy is decided without financial KPIs – key performance indicators – to support it and measure its execution, then teams will not know whether they are advancing in the right direction, and how good they are doing so.

An example. If a team’s goal is to increase their ROI – return on investment – by 2% each quarter, and they are monitoring a quarterly increase of 2.2%, then they are doing better than expected. Knowing that, maybe they will feel comfortable increasing their investment.

The effect will also be that team members will be motivated by numbers and have a better understanding whether their goal is achievable under the given conditions, or not.

Inversely, if the strategy is to become the market leader but there is no way to prove it, teams might wrongly feel that they have achieved their goal – and oversee competition – or underestimate their performance and feel demotivated about it.

Setting financial KPIs – and understanding them – is therefore fundamental in understanding where organizations stand regarding their strategy and how they perform. And this is a core takeaway of our finance simulation.

KPIs also provide guidance as to how actions should be adjusted to meet strategic goals: maybe the organization is spending too much on an aspect that does not really generate value, and they can reorient their investment towards more value-generating elements.

What about the second aspect, stability?

Being knowledgeable about how business finance works and having a set of KPIs at hand is like having a seesaw and a blueprint.

It does not necessarily mean that your first try will yield amazing results, but the blueprint helps reduce the risk of yielding something terrible.

If strategic decisions are disconnected from the financial reality of a business, then – spoiler alert – the financial reality will prevail, and strategy will constantly need to be adapted, until it matches the financial reality. Something students end up realizing when playing our business simulations, after losing quite some money.

Yet, you might remember from business school – or experience – that being reactive entails much more risks of losing competitiveness than being proactive.

Concretely, imagine you are operating on a market where fixed costs are known to be very high, but you keep producing small volumes, and/or you sell at a low price. In both cases, there is a big chance that your profitability is suffering from that decision. Now if your production allows for economies of scale, do it, but make sure demand will match! And if you can’t tap into economies of scale, but a higher price can be justified by the value you generate in the eyes of the customer, do it!

Being aware of the nature of your costs helps to make decisions in terms of production scale, pricing, and much more.

And this leads us to the third aspect: relevance.

Designing a corporate vision and strategy is a top-down, and bottom-up process. Speaking the same language – business finance – helps crystalize this vision around a set of measurable milestones, which are anchored in the reality of the industry.

This steady anchor enables organizations to aim for sustainable practices, while focusing on what generates value for the customers, and for the business. When decision-makers speak the same language as the CFO and the finance team, communication is more efficient and better decisions are made.

In other words, it makes decisions more relevant.

An example would be a company investing in features that have neutral – or negative – effects on the customers’ perception of the product. This in turn impacts the company’s net promoter score, which can damage demand, revenue, and therefore return on investment. If the decision had been to focus on features that are known to please that target group, then it would lead to better return on investment in that case.

Learning business finance can be fun

So, it is pretty clear that there is no workaround: understanding business finance is essential for businesses to thrive – and survive.

Yet, let’s be honest, not everyone is excited about sitting through business finance theory.

So how to engage non-financial professionals and students when the topic is quite serious? There are two aspects to consider:

A core principle of engagement is to let people understand why they are doing what they are doing, and how this will empower them further. They need to think in system: how their decisions impact the organization and other departments. Important will therefore be to let learners understand the importance of business finance in developing and executing a business strategy.

Another principle of engagement is to have FUN! To understand a system and its dynamics, playing is a great way to draw firsthand experience. Playing also helps gain confidence in trying, and having a more open, creative mind. In a game, work politics cease to exist, and everyone is on equal footing. It also binds people and lets them focus on the perceived goal of the experience – winning – while enabling the real goal – learning!

In a business simulation, or a business game, teams of participants take the lead of a fictional manufacturing company designing, producing, and selling two very different products – product A and product B.

Each of these two separate markets display differences in terms of customer behaviors, manufacturing costs, investment needs, and product life cycle, for example.

The goal of teams is to allocate available financial resources efficiently, aiming for profitable and sustainable growth, in a very competitive environment. Market leadership can be reached by building a sound business model:

  • Creating value for customers, thereby attracting demand, and delivering on demand.
  • Creating value for their organization, by offering products at a price that allows them to be profitable.

While the experience is very engaging and funny – both for educators and learners –, it is also a chance to cover some fundamentals of business finance such as:

  • Value creation
  • The three financial statements
  • The implications of profitability, cash, and financing needs
  • Understanding how one’s decisions influence the financial result of the business
  • Developing a capacity to identify the right KPIs and create monitoring tools
  • Gaining ability and confidence to engage with and contribute to financial discussions

This game is usually played in corporate trainings involving junior to middle managers, and in corporate finance classes at university.

The flexibility of the tool allows a (recommended) total playing time ranging from 5 to 16 hours, which can be spread over days, weeks, or even months.

Where can I try MEGA Learning’s finance simulation?

We can feel your excitement through the screen!

There are multiple ways you can get a taste of our finance business simulation:

  • you can reach out to us below to receive a demo access
  • you can book an appointment with us to explore the game with us and ask your questions
  • you can register for the upcoming business finance challenge, starting on April 11!

You can also choose all three options, if you want to have a full experience as a player, and an educator.

To get in touch, you can find us on LinkedIn!