Financial knowledge is not business acumen: the lesson every leader should learn

Two groups played the same business simulation on the same day. One group made money in every round. The other lost money in every round. The gap between them is the most important lesson in business acumen we know, and it is not the one most people expect.

Two groups, one simulation, opposite results

We recently ran Compete, our popular business acumen simulation, in its simplest form: rival coffee shops competing in the same market. We ran it with two very different groups.

The first group was four teams of social enterprise leaders. Every team made a healthy profit on each of the four days they traded. The second group was six teams of finance graduates. Every team lost money in every round.

To say we were surprised would be an understatement. The briefings, the team planning, and the facilitation were the same in both sessions, so why the enormous difference in results?

What the replays revealed

Compete lets us replay every team's decisions round by round, so we crunched the numbers. First we checked for a bug in the simulation, and thankfully there was none: both sessions behaved exactly as they should in response to the decisions each team submitted. So we looked instead at what each group was trying to achieve.

The social enterprise leaders applied simple, sound business principles. They focused on the customer, and set their prices so that every sale made money. Their goals for the four days were pragmatic: a solid profit margin, day after day.

The finance graduates applied what I can only describe as 'finance smarts'. In almost every round, at least one team priced well below cost to buy market share and hold on to it. Their goals were competitive rather than commercial: the largest market share, the biggest revenue, the number one position.

It backfired. When one or two teams bought the market in a round, there was not enough of it left for everyone else to cover their fixed costs, so those teams lost money. Worse, the teams that had 'won' the market lost the most of all, because they were selling a huge volume below cost. A lose-lose result all round.

Two ways to run a business

The pattern points to something simple but profound. There are broadly two strategies you can bring to a competitive market: good business principles, or finance smarts.

Good business principles work in almost every case. The rare exception is a market too small to sustain all its competitors, where some consolidation has to happen before anyone can make money. But in the simulation, as in life, there is usually more than enough demand to go round, and nobody has to fail for you to win.

Finance smarts, by contrast, works only in narrow conditions. It relies on flawless execution, on being one of the very few players using it, and on having the deepest pockets to absorb the losses along the way. It is high risk because it assumes your rivals are less capable than you are. If even one of them mirrors your strategy, you both end up in a race to the bottom, driving the value out of the market: mutual assured destruction. It also assumes you can predict what several competitors will do at once, which, with more than two players in the market, is closer to wishful thinking than strategy.

Financial knowledge is not business acumen

Here is the uncomfortable part for anyone hiring bright graduates. The people who arrive fresh from a strong finance education are often the ones most likely to reach for finance smarts as they grow into leadership, unless someone teaches them otherwise early on.

That is because financial knowledge and business acumen are not the same thing. Financial knowledge is understanding the numbers: margins, cash flow, market share, and what the statements say. Business acumen is knowing which numbers matter, why they matter, and what a decision will actually do to a market and the people in it. Financial literacy is necessary, but it is not sufficient. The Perth Leadership Institute makes the point sharply: business acumen is built mainly through behaviour and experience, not through formal education alone.

The clearest way to see the difference is where each one puts its attention. Finance smarts focuses on your competitors. Good business principles focus on the two groups who actually decide whether a business succeeds: your customers, whose money you are earning, and your shareholders, whose money you are investing. Get those two right, and the competition tends to look after itself.

You cannot lecture acumen into people

If business acumen is learned through experience, it cannot be delivered in a slide deck. People build it by making real decisions, watching the consequences unfold, and adjusting, ideally somewhere the mistakes are educational rather than expensive.

That is exactly what an immersive, live and in-person business simulation provides. In a session facilitated by our experts, a team runs a business, commits to real decisions, and sees the results play out in real time, then goes again with what they have learned. Learning this way lasts: experiential learning can lift retention by as much as 75% compared with traditional classroom training. The good news for our finance graduates is that they have now learned, safely, what a finance smarts strategy really costs, and that financial knowledge and business acumen are two very different things.

Building commercial judgement in your own leaders

If you want your future leaders to make sound commercial decisions rather than clever destructive ones, the financial acumen challenge is the place to start, and Compete is the simulation that teaches this particular lesson best. Both give your people the experience of running a business and living with the results, which is how real business acumen is built.

I wish someone had taught me all this back in 2004, before I learned it the hard way in a very expensive, and ultimately unsuccessful, high-tech start-up.