Business Acumen Defined
Perth formally defines business acumen as "the behavioral propensity to create capital". Our informal definition is "the ability to create positive financial outcomes".
Defining Business Acumen in Quantitative Terms
Perth has developed assessments which assess and measure the business acumen of individuals and teams. We have operationalized this definition by defining business acumen as being the difference between the innovativeness of an individual and the resources used in achieving that particular level of innovation.
We can adopt this approach because innovativeness is reflected in the gross margin impact of that person and their resource use is reflected in their expense impact. The difference between gross margin and expenses is operating profit. This reflects the level of business acumen of this individual. Therefore we can define business acumen in both behavioral and quantitative terms, as reflected in the income statement of an individual or a company.
Our Research into Business Acumen
Our research supports and extends other research in the areas of behavioral economics and behavioral finance. These emerging disciplines have shown that there are underlying cognitive biases that affect business decisions and often lead to poor and unintended financial results.
These decisions need not be financial decisions. The underlying idea behind our research is that all decisions have financial consequences, even if they are not explicitly about financial matters. If we wish to understand the financial performance that results from our leadership, we must understand and measure these cognitive biases in order to be able to predict financial outcomes and performance and in order to be able to improve them.
Everyone has cognitive biases. Most of these biases tend to adversely impact financial outcomes. Our cognitive biases are different in their strength and impact. We each have financial traits and these cognitive biases mean that these financial traits result in different financial performance depending on who is managing and leading.
Because each individual has unique personal financial traits, there are innate calculi that manifest in our financial decisions; financial signatures that are innate and which cannot be changed. The expression of these financial traits is an individual's financial mission, which, through the growth of an individual's business acumen and through self-awareness from training, can be altered. Though unconscious, these behaviors can be targeted and controlled in order to improve financial outcomes including profitability and valuation through the development of business acumen.
Business Acumen Assessment Instruments
Perth's behavioral assessments can predict the financial outcomes from a person's or a team's behaviors based on their measurements of the cognitive biases that impact financial outcomes. With these results, business acumen development programs can intervene and improve the financial decision making capabilities of an individual or team based on improved self-awareness of the behaviors that lead to positive financial outcomes.
Improved business acumen sharpens a person's or a team's ability to link one's own behavior to the external business playing field with a new awareness as to the behavioral linkages involved. Perth's Programs, Seminars, and Assessments are designed to provide awareness and development of business acumen at the individual, team, and and company level.
Business Acumen and Financial Literacy
It is important to note that business acumen is not the same thing as financial literacy. The latter is formal knowledge that can be learned. However learning may not affect decision-making favorably. Often higher financial literacy may lead to poorer decision-making due to the increased strength of the cognitive bias of over-confidence.
In short, the key issue in achieving positive financial outcomes is not financial knowledge per se but an awarness of the links between behavior and financial outcomes and the mental agility needed to change one's behavior, even when this is not comfortable foe the decision-maker.
For more of Perth Leadership's insights on business acumen, you may be interested in our White Paper, The Role of Business Acumen in Leadership Development.