Are Your Coaches and Consultants Financially Literate?

I was attending a meeting at one of my client companies a couple of years ago. They regularly conducted sessions for the external executive coaches with whom their leaders worked, to provide updates on company results and strategy.

During one segment of the meeting, the presenter used the accounting term “goodwill.” The executive coach seated next to me leaned over to me and quietly asked: “What’s goodwill?” I was flabbergasted and wondered to myself: “How (or WHY!) could or would any company do business with external coaches or consultants who do not have a fundamental understanding of finance? If their balance sheet is a primary indicator of strategic success and their income and cash-flow statements are fundamental indicators of operating success, how can external experts support their business success without a fundamental working knowledge of these documents and their interrelationships?”

During a meeting at another client company, an external executive coach said the following to me: “I just don’t understand why companies treat people development as an ‘expense’ and not as an ‘investment’. Whenever expense reductions are required, training and development get cut.” My reaction – out loud this time: “People development is treated as an expense because it is. Maybe one day, accounting rules will allow training and development to be treated as a capital expense rather than as an operating expense. If that happens, an annual increment could be expensed as depreciation. I think that more accurately expresses how training and development ought to be booked, as the value of new knowledge and skills depreciates over time. What do you think?”

He said, “I agree,” but I know down to my socks that he had no idea what I was talking about.

I know a woman who makes hundreds of thousands of dollars a year selling HR solutions to large companies for a top three, international HR consulting firm. One day when we were discussing her investments, she said to me, “I generally sell a stock when it hits $100.” I looked at her incredulously and said, “I think you need professional help managing your investments,” while thinking, “How can she possibly help her clients create value if her investment acumen indicates her overall lack of financial literacy?”

Here’s my bottom line (pun intended) on this matter: If you are doing business with external experts, they need to have at least a working knowledge of finance. Otherwise, they cannot possibly understand how your company makes money. If they don’t understand how your company makes money, they cannot possibly appreciate how to help you create value for the buyers of your products and services. If the professional services you purchase do not, at some point, translate into value for your customers, YOU ARE WASTING YOUR MONEY!!!

What should you do about this? I’m happy you asked.

As part of your triage process, engage professional service providers in a discussion that enables you to subtly (or not so subtly) ask the following questions. These are issues and terms that are critical to a company’s success. Your consultants and coaches must have a basic understanding of them in order to create value for you:

• What is EBITDA and why is it important?

• What does “hurdle rate” mean, in the context of a company considering internal investments?

• What are “net present value” and “discounted cash flow”?

• How does the prospective valuation of “goodwill” affect the valuation of an acquisition candidate?

These are NOT complex concepts. An outside expert pitching you on his products or services ought to have at least a fundamental understanding of income statement and balance sheet issues if he is to be a partner in your success.

Copyright 2010 Rand Golletz. All rights reserved.