In business, even at the highest level, it's common to try and avoid the financials. While key decision makers will have extensive knowledge of their business' processes and systems, the financial side of things is simply left to the accountants.
However, in the modern era, where accountability and responsibility is high up on the agenda, everyone at all levels of an organisation must have a solid grounding in finance.
The problem is, how can we do this when just the word "accounting" inspires such a mix of negative emotions? There is a solution: Colour Accounting, an innovative way of teaching people about the financials which uses words instead of the language of numbers.
The state of financial literacy in New Zealand
Financial literacy is defined as the ability to make informed judgements regarding the use of money. Yet, due to the tendency of people to shy away from numbers, the state of financial literacy in New Zealand is fairly mixed.
Though we are ranked 11th in the world in financial literacy, according to Standard & Poor's Global Financial Literacy Survey, there remains less than two thirds (61 per cent) of New Zealanders who are considered financially literate.
And while you might be thinking the standard of financial literacy in the wider public doesn't matter as long as those in business have a solid grasp of accounting, the fact of the matter is that it is these same people who make up the business population.
Hence it comes as no surprise that, when the Harvard Business Review (HBR) gave a representative sample of US managers (from C-level executive right down to supervisors) a basic financial literacy exam, the average score was just 38 per cent. Although we don't have a similar managerial survey for New Zealand, the US' score on the Standard & Poor survey was just 4 percentage points behind at 57, so we can assume that the financial knowledge of managers in this country would sit at similar levels.
Many of the people who participated in the HBR study showed a lack of understanding of even the most basic financial concepts. These included:
- A majority were unable to distinguish profit from cash.
- Many couldn't tell the difference between income statement and balance sheet.
- Around 70 per cent did not know the definition of "free cash flow".
Why is it important to be financially literate in business?
While the advantages of being financially literate should be obvious, the lack of financial knowledge outside the accountancy department suggests that many people in business don't realise these benefits.
Financial literacy is essential in business for a number of reasons, including:
- Those at the top need to understand the financial ramifications of business decisions. That's why about 30 per cent of Fortune 500 CEOs spent their early careers developing a strong foundation in finance, according to Forbes.
- Employees at all levels need to know how their own work impacts the financial health of the business.
- Edelman's annual trust barometer indicates trust in business is low, sitting at just 52 per cent worldwide. It's essential that boards and executives are able to detect irregular activity in their businesses as early as possible to try and prevent it. Fraudulent acts almost always manifest themselves in the accounts in some way, so being able to spot this is essential.
The benefits of being financially literate in all areas of an organisation are clear. However traditional accounting methods, also known as double entry accounting, clearly aren't the right way to teach people. Fortunately, there is an alternative: Colour Accounting.
A new language: Colour Accounting
Colour Accounting is an alternative way of training people in financial literacy. The key difficulty with teaching accounting is that most people don't understand the language of numbers. Colour Accounting essentially acts as the translator.
It's a one-day workshop using colours and 3-D shapes that's designed for non-accountants and assumes a zero-knowledge base.
The colours relate to the concept of accounting duality - that the uses of funds (assets and expenses) must be equal to sources of funds (liabilities, equity and income):
- Uses of funds are coloured green, sources of funds are yellow.
- The link between the income statement and balance sheet, profit, is colour-coded purple.
- The course is grounded in real-life business examples.
BDO NZ and Colour Accounting
BDO is thrilled to have the opportunity to teach financial literacy to as many New Zealanders as possible. We are holding one-day public workshops across the country, as well as in-house workshops where a business has ten or more attendees. These are specifically tailored to each business and its industry, while the public workshops are designed to give as broad a background as possible.
Attendees to the workshop are asked to rate their comfort level with financial information before and after. The average level of financial knowledge across a sample of workshops was just 4.3 out of 10 before the workshop occurred, but afterwards this jumped to 7.5 - a clear testament to the power of Colour Accounting.
Financial knowledge isn't something only your accountant needs to have. It's essential for everyone in all areas of an organisation and the wider public as well. As such, BDO New Zealand truly believes that Colour Accounting has the potential to change the financial literacy of the country.
For more information and to start your Colour Accounting journey, contact us today.