Today we're pleased to feature an essay from Ram Charan, author of Leaders at all Levels
. Here, Charan discusses the impact profit and loss has on the balance sheet and overall health of an organization, especially when a leader is in tune with those numbers. An intuitive feel for business is evident in good leaders, whether seasoned or rookie, and it is the ability to harness that acumen that makes the difference, especially when it comes to adding value to the organization or when promotion opportunities are at hand.
By Ram Charan
Every successful businessperson, whether a street vendor or the CEO of a global empire, has a basic understanding of how the business makes money. The essence of making money is managing the profit and loss (P&L) as well as the balance sheet of a business in the context of the external world. Let there be no mistake, profit and loss is a much broader concept than profit or loss. Managing the profit and loss within a business requires that a person take in myriad factors and pieces of information -- much of which is incomplete or distorted -- that contribute to either a profit or a loss, connect those various conflicting things, and make the trade-offs among them with the clear goal of making money and generating cash on a sustained basis. The leader must also know how profits and losses interact with the company's balance sheet, which indicates the health of the company.
This cognitive ability to conceptualize the working of the business is present and highly developed in every successful CEO I have known. It is the CEO nucleus defined in Chapter 2: "the intuitive ability to comprehend the total picture of a business and how it makes money in the language of a street vendor."
We can't expect a thirty-year-old leader to have the business acumen of a forty-five-year-old, but an intuitive feel for business is evident at an early age if we bother to look for it. These are the people who intuitively understand the connections between customers, profits, money they borrow, and money they take in. This business acumen is evident even in the simplest contexts, such as that of a small shop with a well-defined customer base and a handful of competitors. You see it in shopkeepers who mark the prices down in the right increments at the right time, buy the right merchandise, and create the right shopping experience, constantly making adjustments to keep the cash flowing. They have a knack for making the right trade-offs and decisions, and the business prospers.
You also can see it in some leaders at the lowest organizational levels and in the earliest stages of their careers in a big company. They have a sense of how their company makes money, what it really offers customers, and how it compares with the competition. Given the chance to run even a tiny P&L center, they have the ability to weigh multiple factors, from changes in the external environment to internal constraints, in deciding how to position the business and expand its money making. They understand the relationships between the variables, do the mental processing to determine which are most important, and make decisions that deliver clear, measurable business results.
As the scope of a leader's job increases, so do the number of variables and the uncertainty about them. The complexity grows exponentially. The leader needs greater mental breadth and depth to make the connections between the complexities of the outside world and the intricacies of money making. She also needs incisiveness to cut through that complexity to the shopkeeper fundamentals. When leaders are unable to make good decisions, or any decisions at all, it may be that their business acumen is not expanding. They cannot be considered to have CEO potential. A sales manager who becomes the executive vice president of marketing and product development may face the problem of identifying the need for innovative products that will satisfy new customer needs. He has to balance the risks of developing those new products against the business's growth, all of which requires a broader scope of thinking and acting. If he can't do it, that's a sign that his business acumen will not develop fast enough for him to become a successful CEO of a major company. Leaders who continue to develop their business acumen, or CEO nucleus, expand their capability, or their ability to add more value per increment of time by taking on more complexity, ambiguity, and uncertainty.
The search for business acumen will help keep other traits and skills in perspective. For instance, great communication skills help leaders motivate people, implement a strategy, and win over customers, investors, and the public. But business acumen defines the substance of the message being communicated. Some young leaders can excite and lead their group to deliver on stretch goals, but can they define where the group is going? Are they decisive, and can they sort through multiple alternatives to find the right pathway forward? Can they use their business acumen to choose the right goals and KPIs? With practice, any leader can improve, but some leaders are naturally better at it.
Copyright (c) 2008 Ram Charan from the book Leaders at All Levels
by Ram Charan Published by Jossey-Bass; December 2007; $27.95US/$33.99CAN; 9780787985592
Ram Charan is the author or coauthor of many bestselling business books, including What the CEO Wants You to Know
. For more than thirty-five years, he has worked behind the scenes at Fortune 100 companies like GE, Bank of America, DuPont, Thomson financial, Honeywell and Home Depot to help senior executives develop and implement strategic plans.