Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. The term "business acumen" can be broken down literally as a composite of its two component words: Business literacy is defined in SHRM's Business Literacy Glossary as "the knowledge and understanding of the financial, accounting, marketing and operational functions of an organization." The Oxford English Dictionary defines acumen as "the ability to make good judgments and quick decisions". Given these textbook definitions, a strictly literal definition would be "keenness and quickness in understanding and dealing with a business situation."
Additionally, business acumen has emerged as a vehicle for improving financial performance and leadership development. Consequently, several different types of strategies have developed around improving business acumen.
Executive level thinking
In his 2012 work, Seeing the Big Picture, Business Acumen to Build Your Credibility, Career, and Company, Kevin R. Cope put forward his research that an individual who possesses business acumen views the business with an "executive mentality" - they understand how the moving parts of a company work together to make it successful and how financial metrics like profit margin, cash flow, and stock price reflect how well each of those moving parts is doing its job. Cope proposes that an individual who has the following five abilities could be described as someone having a strong sense of business acumen:
- See the “big picture” of your organization—how the key drivers of your business relate to each other, work together to produce profitable growth, and relate to the job you do each day
- Understand important company communications and data, including financial statements
- Use your knowledge to make good decisions
- Understand how your actions and decisions impact key company measures and the objectives of your company’s leadership
- Effectively communicate your ideas to other employees, managers, executives, and the public
Business savvy and business sense
"Business savvy" and "business sense" are often used as synonyms, but they don't describe what people with business acumen do differently from those who are lacking the skill. Dr. Raymond R. Reilly of the Ross School of Business at the University of Michigan and Dr. Gregory P. Reilly of the University of Connecticut document traits that individuals with business acumen possess:
- Have an acute perception of the dimensions of business issues
- Can make sense out of complexity and an uncertain future
- Are mindful of the implications of a choice for all the affected parties
- Are decisive
- Are flexible if further change is warranted in the future
Thus, developing stronger business acumen means a more thoughtful analysis, clearer logic underlying business decisions, closer attention to key dimensions of implementation and operation, and more disciplined performance management.
Financial literacy is a comprehensive understanding of the drivers of growth, profitability, and cash flow; an organization's financial statements; key performance measures; and the implications of decisions on value creation. In a SHRM article entitled, "Business Acumen Involves More Than Numbers" Chris Berger, a principal and member of the human resources practice at CTPartners, explains that business acumen starts with the ability to understand how a company makes decisions, and that leaders must be financially literate and be able to understand numbers on company financial statements. But he says those demonstrating business acumen have the ability to take their knowledge of business fundamentals and use it to think strategically and then take appropriate action. "It's really the ability to think and act," he adds.
An October 2007 research paper based on the book The Three Financial Styles of Very Successful Leaders (McGraw-Hill, 2005) the book's author E. Ted Prince reports that, "Financial literacy is almost never the need for senior managers and high potentials. Most already possess degrees in business, including MBAs, and many have also had significant experience in the business sides of their professional roles. The real need for these managers is to understand how their actions and their behavior impact their financial decision-making and how this in turn affects financial outcomes at the unit and the corporate level." It's evident that an individual with business acumen has some level of financial understanding and knowledge - but someone who is financially literate doesn't necessarily possess strong business acumen.
Business management and leadership
Bob Selden, faculty member of Mobilizing People, a leadership development program based in Switzerland, observes a complementary relationship between business acumen and leadership. Selden states the importance of nurturing both the development of strategic skills and that of good leadership and management skills in order for business leaders to achieve effectiveness.
A study published in Human Resource Management International Digest titled, Business acumen: a critical concern of modern leadership development: Global trends accelerate the move away from traditional approaches, reveals why traditional leadership development approaches, which rely on personality and competency assessments as the scientific core of their approach, are failing. The paper demonstrates the importance of business acumen in leadership-development approaches and contends that business acumen will have an increasing impact on leadership development and HR agendas. Research into this relationship resulted in the creation of the Perth Leadership Outcome Model, which links financial outcomes to individual leadership traits.
In a study that interviewed 55 global business leaders, business acumen was cited as the most critical competency area for global leaders.
In their 2011 work, The Leadership Pipeline, Ram Charan, Stephen Drotter, and James Noel study the process and criteria for selecting a group manager, and suggest that the process and criteria are similar for selecting a CEO. According to them an obvious criterium for selecting a leader is well-developed business acumen.
An organization full of high business acumen individuals can expect to see leaders with a heightened perspective that translates into an ability to inspire and excite the organization to achieve its potential.
Programs designed to improve an individual or group's business acumen have been a primary factor in fueling the growth of business acumen as a significant topic in the corporate world. Executive Development Associates' 2009/2010 survey of Chief Learning Officers, Senior Vice Presidents of Human Resources, and Heads of Executive and Leadership Development listed business acumen as the second most significant trend in executive development. A 2011 report published by Merrill C. Anderson Ph.D. explored in detail the impact of business acumen training on an organization in terms of intangibles and more tangible expressions of value. Dr. Anderson's findings support the opinions of Dr. Raymond R. Reilly and Dr. Gregory P. Reilly that business acumen is a learned skill - developed on the job by learning the required skills from knowledge mentors while working in different employment positions. They also suggest that the learning process ranges widely, from highly structured internal company training programs, to an individual's self-chosen moves from one position to another. The combination of these reports and surveys indicate that business acumen is a learned skill of increasing importance within the corporate world. In general, there are three different types of business acumen development programs available:
A business simulation is another corporate development tool used to increase business acumen. Several companies offer business simulations as a way to educate mid-level managers and non-financial leaders within their organization on cash flow and financial-decision-making processes. Their forms can vary from computer simulations to boardgame-style simulations.
The advent of personal assessments for business acumen is based in the emerging theories of behavioral finance and attempts to correlate innate personality traits with positive financial outcomes. This method approaches business acumen not as entirely based in either knowledge or experience, but on the combination of these and other factors which comprise an individual's financial personality or "signature". The results from this research have been limited, but noteworthy.
- Reilly, Dr. Raymond R and Reilly, Dr. Gregory P. "Building Business Acumen", HR West, December 2009.
- SHRM's Business Literacy Glossary
- Oxford English Dictionary's definition of acumen
- Summerfield, Brian. "A Crisis in Leadership", Chief Learning Officer Magazine, April 2008.
- Cope, Kevin (2012). Seeing the Big Picture. USA: Greenleaf Book Group. p. 2. ISBN 978-1-60832-246-6.
- Cope, Kevin (2012). Seeing the Big Picture. USA: Greenleaf Book Group. p. 3. ISBN 978-1-60832-246-6.
- Hastings, Rebecca R. "Business Acumen Involves More Than Numbers", SHRM, April 2008.
- Selden, Bob. "Is Business Acumen a Substitute for Leadership?", 26 February 2008.
- Prince, Ted (2008). "Business acumen: a critical concern of modern leadership development: Global trends accelerate the move away from traditional approaches". Human Resource Management International Digest. 16 (6): 6–9. Retrieved 2011-02-18.
- Cohen, Ed (2007). Leadership Without Borders. USA: John Wiley and Sons. p. 14. ISBN 978-0-470-82227-2.
- Charan, Ram; Noel, James; Drotter, Stephen (2011). The Leadership Pipeline. USA: John Wiley and Sons. p. 139. ISBN 978-0-470-89456-9.
- Hagemann, Bonnie "2009/2010 Trends in Executive Development", 2009.
- Anderson, Dr. Merrill C. "MetrixGlobal Study of Business Acumen Training", March 2011.
- Perth Leadership Institute White Paper:Business Acumen and Leadership Development for CEOs and Senior Executives
- Prince, E. Ted. "Research note: how the financial styles of managers impact financial and valuation metrics." Review of Accounting and Finance 7.2 (2008):193-205