“Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. The term ‘business acumen’ can be broken down literally as a composite of its two component words: Business literacy is defined in SHRM’s Business Literacy Glossary as ‘the knowledge and understanding of the financial, accounting, marketing and operational functions of an organization.’ The Oxford English Dictionary defines acumen as ‘the ability to make good judgments and quick decisions’. Given these textbook definitions, a strictly literal definition would be ‘keenness and quickness in understanding and dealing with a business situation.’

Additionally, business acumen has emerged as a vehicle for improving financial performance and leadership development.A adsssa Consequently, several different types of strategies have developed around improving business acumen.”

I was delighted by a few of the things I read in the definition.  The first idea was the use of the words “keenness” and “quickness.”  In today’s increasingly competitive global economy, organizations need leaders who can act keenly and quickly in response to changes in their environment in order to stay on top.

Secondly, the definition indicates that business acumen has emerged as a vehicle for improving not only financial performance but, more importantly, leadership development.  In observing leaders from all levels and types of organizations over the past 15 years, I have noticed that leaders who understand of the fundamentals of business are better equipped to tackle all types of leadership challenges that they face.

I recognize that good leadership contains many facets including being a good communicator, knowing how to build strong teams, facilitator, coach, delegator, planner, and so on.  But I’ve always been impressed with leaders who have developed their business acumen, who can speak to and relate to how businesses function at the core.  This leadership mechanism seems to be the lever that makes the best leaders successful when used along in concert with the other fundamental qualities of leadership.  As organizations seek to develop their leadership bench strength, I believe it will be increasingly important for business acumen to be at the core of any organization’s leadership-development process.

After some back and forth discussion and analysis using business acumen, we wound up agreeing on the following:  Most retail outlets price their steaks by the cost per pound.  This is their way of representing the true value of a steak.  However, after discussing this information and challenging each others perspectives a bit, we came to the conclusion that the best valuation is not the cost per pound, but the cost per edible portion.  Steak contains water, fat, and bones that may be cooked off or not consumable.  Ultimately, you are paying a price for a piece of meat and should want to consume as much of it as possible.  Now, I realize that this is not the only way to value a steak, but is the best overall representation of its true cost and value.

I share this simple analysis with you, because if organizations can get managers and employees to think and speak the language of business, it will pay dividends to the bottom line.  The way information in business is represented can be tricky and confusing when talking about finance, economics, and strategy.  By developing business acumen skills, more people will begin to understand and identify the true costs and understand how these decisions can greatly impact the bottom line.

Next time you’re involved in a purchase or assessing how viable an initiative is for your company, take a step back, process the information and ask the question “what is the true cost”?   It might surprise you.

Question #1: Is it possible for a manager to manage sales in a retail store?

Through out the retail industry, including manufacturers and distributors, the sales number is often the number one priority. Indeed, in many companies sales numbers are so far above any other measurement that managers live and breathe by whether sales are up, or down. If sales numbers are so important they must be manageable, right? Let’s find out.

A number of years ago two highly experienced retail store managers quit their jobs and promising careers and purchased two stores and began a career of teamwork as owner-partners, rather than employees of a large chain. For four years the partners did everything imaginable to build sales volume in both stores. During the first two years the partners frequently told friends and family, “Sales are up.” In fact, about 18 months into the venture one of the partners said, “Can you believe it, our sales are up 22 percent over last year!” Without doubt these two owner-partners had achieved the American dream. They owned their own business and were controlling their own destiny. Clearly, everyone who knew the owners was envious, wishing they had as much courage to do the same. After all, isn’t this how other successful retail business began?

The first indication of trouble was when the partners tried to sell one of their stores. When that didn’t happen, they abruptly closed it over a weekend. Their explanation was that the store had always had problems and by closing it they could focus their attention and capital resources on the one remaining store. With the problem store closed, friends and family once again heard reports of, “Sales are up.” But within a few months the second store was also closed and the owner-partners declared personal and business bankruptcy. Literally the partners lost almost everything they owned. They escaped the failed venture with one taking a job as a clerk for Home Depot, and the other selling used cars.

What happened? If sales were consistently up, how could the business not be profitable? The answer is that in retail there is no direct connection between sales and profit. Unless gross and expenses are fixed, sales and profit become independent variables. It is possible for sales to go up, for example, while profit goes down; and profit can go up, while sales go down. The reason is that there are no guarantees in retail. Other factors such as gross margin, labor, overhead, and expenses have greater impact on profit than sales alone. That’s what happened and crushed the American dream for two enterprising, former, store managers. Now do you know the answer to the question, “Can sales be managed?” Let’s use a bit of strategic thinking and drill a little deeper toward the answer.

Question #2: Is there anything a manager can do directly to sales that will make the number change? Is it only possible to impact sales by influencing other factors?

Actually, sales are a product of two factors. That means nothing can be done directly to sales to make it change. To change sales a manager must manage something else, not sales itself. Therefore, to focus primarily or excessively on an unmanageable number, at the expense of the things that can change it, could lead to failure. This explains the failure of the two storeowners.

Question #3: What are the only two factors that determine sales in a retail store? Can these two factors be managed?

It’s true that many things contribute to retail sales; things like, margin, signing, suggestive selling, pricing, displays, merchandising, stocking, store location, advertising, product availability, and many more. But all of these things can be rolled up into two factors. Do you know what they are? The accompanying illustration is the key. All of the things listed above, and many more contribute to two factors: (1) Number of Guests, and (2) Sale Per Guest. The number of guests and the amount of each transaction determines sales. Did you answer correctly?

Question #4: Can the two factors that contribute to sales, Number of Guests and Sale Per Guest, be managed?

As with the sales number, what can a manager do directly to Number of Guests or Sale Per Guest to make them change? The answer is, not much. Once again, it isn’t possible to manage these numbers either, because they are the products of other things. Although they are excellent measurements of the health of a retail store (or company), they are technically unmanageable. To focus primarily or extensively on them at the expense of the basic things that really drive sales could be a mistake.

Question #5: So what can a retail manager manage?

The answer to this question is everything that contributes, or rolls into, Number of Guests and Sale Per Guest. The basic elements are the things that can be managed, not the products of these elements. That means the most effective place to manage sales is not with sales itself, but rather in all of the fundamental elements that begin the process. These are the things that are manageable, not the product number such as sales. When a retail employee is told, “Your sales are down, you better get them up,” the employee can only make the change at the basic element level. And if the employee doesn’t have a good understanding of the process, it will be very difficult to make the change.

Thomas Cooley, professor of economics and former dean of the NYU Stern School of Business, articulates the importance of having strong financial knowledge:

Many of the most important decisions consumers make in their lifetimes involve financial products: a mortgage to purchase a home, a loan to purchase an automobile, credit to make a large durable purchase, investments for retirement and insurance to keep one’s family secure. All of these financial products have become increasingly complex over time and there is a much wider range of product options offered by different providers, making decision-making more complicated. Consumers need to be financially literate in order to make well-informed choices about such complex products. A growing body of evidence suggests that many consumers lack the knowledge they need to evaluate and make decisions about financial instruments.

Fixing our financial illiteracy and understanding  the fundamentals of business acumen (finance, economics, accounting, and strategy) will not only aid you in your personal, consumer-based life, as Professor Cooley mentioned above, but will open doors for you at work, allowing you to sit at the conference table and make decisions that ensure viability – the life blood of organizations, the ability to stay competitive, profitable, and relevant.

Maximizing Your Profitability

I was watching a report on CNN last week about the strategies of maximizing their acquisition of treats on Halloween.  Instead of just taking a “dash and grab” approach, some people take a more economic approach to their quest for sweets.  The people at Zillow.com have done some research on five major cities to identify the “best” neighborhoods for trick-or-treating.  While there is a common belief that wealthy neighborhoods are the prime place for harvesting the most Halloween treats, it is only a part of the equation for efficiency.  To provide a more holistic approach to Halloween trick-or-treating, the Zillow Trick-or-Treat Housing Index was calculated using four equally weighted data variables: Zillow Home Value Index, population density, WalkScore (point to point distances), and local crime data. Based on those variables, this Index represents neighborhoods that will provide the most candy, with the least amount of walking and safety risks. 

Jackpot

Some may find Zillow’s index to be an unnecessary approach to the trick-or-treating adventure, but for others it is just the kind of thing that makes the holiday even more enjoyable.  After seeing the report on CNN, I saw this holiday as a great time to teach my kids about economics, finance, and getting the highest revenue with the least amount of input (revenue = candy).  What makes this even more of an economical and financial teaching opportunity is that a local dentist is offering $1.00 for every pound of candy brought to their office during the week after Halloween.  What made this offer even more interesting was that CNN also reported a statistic that the average child gathers 17.1 pounds of candy on Halloween.  So, if my kids want to use Halloween as a chance to have fun and make money, there are strategies to do so.

If you ask parents today if they want their children to go through the higher education system, the answer is predominantly, “yes.”  I believe preparing young people to be ready to receive a college education is as important as actually obtaining one.  The same is true for anyone. There are opportunities for education and skill development all around us, just like this “trick-or-treating” example.

Education To Make A Difference

For those of us who are college age or older, but still have a desire for gaining more education, there are diverse opportunities available.  There are accelerated masters programs, online degrees, and Mini-MBA Workshop.  The Mini-MBA Workshop is a great way to learn the fundamental concepts taught in a traditional MBA program, but at much less costs and in a much shorter time frame.  I attended this fantastic course offered by CMOE, developed and Columbia University, and taught by David L. Buckner.  It helped me to understand the key concepts of economics, finance, and accounting, helping me to be more affluent in the language of business.  Knowing more business acumen key terms and concepts has had a great impact on my contribution to our organization.  While I didn’t earn a Masters degree, I have the ability to apply valuable concepts to my everyday efforts and decisions.  As the writer and scientist, Carl Sagan wrote, “Knowing a great deal is not the same as being smart; intelligence is not information alone but also judgment, the manner in which information is collected and used.”