Financial Intelligence for Entreperenurs and CEOs.
Financial Intelligence (FI) is the capacity and capability to apply acquired financial literacy or knowledge and management skills, to solve or overcome inherent and potential financial challenges.
Thus, FI is a combination of financial literacy and financial management skills.
Financial Literacy + Financial Management Skills ð Financial Intelligence
Financial literacy is the ability to read, understand and disseminate financial information, whilst Financial Management skill is the capacity to plan, organise, direct and control the financial resources of an entity, in the most efficient and effective manner.
Financial Management is discussed in detail, in the next chapter
Financial Intelligence versus Financial Literacy
Financial literacy is the ability to read, understand and write financial information, whereas financial intelligence is the capacity and ability to combine and apply your literacy or knowledge, with financial management skills, to interpret and solve potential and inherent financial challenges.
Financial intelligence is characterized by rapid understanding, sound thought, or good judgment of financial issues.
Thus, an entrepreneur or CEO could be financially literate, but not financially intelligent. The reverse is never the case. Your financial intelligence includes and it’s boosted by your financial literacy.
Case Study 1
Below is an extract from the Statement of Financial Position (Balance Sheet) of XTZ Ltd., for the years 2023, 2022 and 2021.
The CEO and CFO, have expressed their divergent views on the financial position of the company over the 3-year period. The CEO is quite happy about the increasing profit level and balance sheet size, whilst the CFO has some reservations.
What are the financial literacy versus intelligence issues involved?
Discussion
However, a preliminary analysis would indicate that even though the company’s retained profits and balance sheet size were increasing, but at a decreasing rate! The retained profit increased by 62.5% in 2022, from $4.0 million to $6.5 million ($2.5 million jump).
In the year 2023, the retained profit jumped by only $0.9million, from $6.5million in 2022, to $7.4million.So there is actually a decrease in return on investment!
Also, cash balances and other assets, were on a decline, from $3.5million in 2021 to just $500,000 in 2023. The company is running out of cash, despite making profits!
The CEO though had exhibited some level of financial literacy in his ability to read and understand the financial statement, he had shown little financial intelligence to identify dwindling return on investment and fact that the company could have been using its cash to finance (pay back) its liabilities rather than investing the cash to generate more assets.
For deeper and interactive analysis of this case study,attend the next monthly learning workshop on “Financial Intelligence for Entrepreneurs and CEOs.
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