Levels of Financial Knowledge
Wednesday, July 21, 2010
By George E. Manners, Jr.
The framework consists of six levels of financial knowledge, and the word “financial” is most operative here. I mean dollars and sense; this is much more than data and information—I’m talking about knowledge. First let’s take a look at a synopsis of each level.
Level 1:
The business can count and keep score in the aggregate sense (business unit/corporate) by tracking cash, accounts receivables, payables, etc., and it can generate periodic financial statements.
Level 2:
The business has a traceable measure of output volume and readily identifies fixed and variable costs. It has internalized the basic vocabulary of cost/volume/profit (CVP).
Level 3:
The business has a well-defined breakdown of CVP elements and understands how these more detailed elements relate to working capital behavior as well as to both Level 1 and Level 2 templates. It can fundamentally assess the business profitability drivers and can generate appropriate policy statements relative to spending money to make money.
Level 4:
Throughput, as opposed to output, has become the focus of operational and financial knowledge. The fundamental engineering/economic recipes of input/throughput/output (ITO) are known. The primary transformation constraints are known, and this knowledge is a principal factor in
planning and resource allocation.
Level 5:
At least in a planning sense, but, more importantly, operationally, the business can optimize simultaneously across multiple inputs/costs/recipes/ constraints/outputs. Fed by the decision support system, the methodology of marginal economics has moved from the theoretical to the practical.
Level 6:
The business can optimize simultaneously across multiple inputs/ costs /recipes/constraints/outputs and time periods. Managing periodic slack resources, capacity, and inventory across time is accomplished with profound knowledge.
Knowledge acquisition is a journey that requires the appropriate modes of transportation: systems, structures, and processes. It’s a journey that an entire business must take, not just certain subsystems of it. Most of us are familiar with businesses that have subsystems that possess significant knowledge, but until that knowledge is integrated into the company’s overall financial knowledge, the system’s financial knowledge remains at lower levels. Let’s thoroughly investigate the levels by concentrating on the vocabulary and significant knowledge concepts and constructs of each one.
Labels: Financial Knowledge
posted @ 8:50 PM,
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