Financial illiteracy in the managerial ranks can be a crippling weakness for the organization, as well. Imagine a business that is attempting to increase operating cash flow, as many firms are at the moment. Even experienced executives, accustomed to managing a P&L, may be unaware of the many balance-sheet levers they can pull to affect cash—decreasing inventory, for example, or reducing days sales outstanding.

We recently worked with a health care services company seeking to increase its gross margin, and the first thing we had to do was help the sales force understand the difference between making a sale and making a profitable sale. Unfortunately, that’s a widespread problem. Nearly two-thirds of our test takers thought that discounts offered by sales reps had no effect on gross margin. If you don’t understand what goes into a number, you can hardly know how to improve it.

Why don’t people tell their bosses that they don’t speak finance? It’s the usual human reluctance to admit ignorance. In a survey of a different sample of managers, we asked what happens in meetings when people don’t understand financial data. The majority chose answers reflecting that reluctance, such as “Most people don’t ask because they don’t want to appear uninformed in front of their boss or peers.”

via HBS