Financial Literacy: The Essentials Of A Leader

To stay ahead of the game in our progressive society, we have to strive towards developing ourselves in all areas of life, and the younger you start, the better.

The engine of this Utopian society comprises of productive people working towards a similar goal, and sustaining that direction requires substantial leadership qualities. 

Leadership development itself, is a crucial part of personal, professional and influential development.

Whether we like it or not, having a certain level of knowledge in various fields does add credibility to a leader. It enhances their capability and quality of leadership. 

Financial knowledge, in particular, is a strong foundation for any leader to have.

The level of a person’s financial proficiency is an indicator of his or her adaptability and resilience in an ever-changing world full of uncertainty and competition, often contributing to the quality of life and opportunities for growth for that person.

Here’s a brief introduction to financial literacy for young leaders.

Financial Literacy

Financial literacy is defined as the ability to understand how money works: how someone makes, manages, invests and expands it.
Being financially literate also refers to how familiar you are with financial principles and concepts such as time value of money, compound interest, financial planning, managing debt, and profitable saving techniques.

There is enormous value that a financially literate person can bring to the table as a leader, in understanding this building block of business acumen.

It allows a leader to make informed decisions and project the financial impact of their day-to-day choices with confidence. It’s difficult to be a strong player in any game if you can’t read the scorecard.

Responsive to group’s needs

Leaders benefit tremendously when they are financially literate, as they are bound to be more responsive to their group’s financial needs and satisfy them within limited available resources.

Within depth financial knowledge and budgeting techniques, a leader will be immensely capable in sharing resources equitably in accordance with their employees’ needs and goals.

Whether cash or not, developing financial literacy trains a person to analyse and interpret which priorities should be satisfied with the available resources.

For example, budgeting involves identifying revenue and categorising expenses, and this allows the review and monitoring of monthly net cash flows.

When a team is able to distinguish between the different needs of members, this will enable them to have cost-effective coordination.

A financially savvy leader has the advantage, because he or she will be able to use the breakdown of fixed costs (e.g. rent, insurance, department funds, etc.), and reduce variable costs (costs subject to change), in order to maximise profits.

This can be done through prudent financial decisions which allows payment of debts and better yet, the complete avoidance of it. Thus, with a low debt-to-income ratio, your team can better weather storms and take risks.

A leader with a higher level of financial literacy will be able to differentiate and identify which fixed costs deserves a higher amount of funding compared to the others for the benefit of the team.

This of course can be done through understanding and evaluating financial statements such as balance sheets, income statements, cash flow statements, etc., which requires a good grasp of financial knowledge.

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Risk taking: A valuable trait of a leader 

To be financially literate, one must be able to understand the law of ‘high risk and high return’, and vice versa.

This is particularly important in stock investments, where investors would need to adjust their risk profile and preference from time to time, because this correlates with their potential return of investment.

A financially literate person understands about managing and accepting opportunity cost.

For example, high risk financial securities can be high return investments to build wealth, but there is a risk of losing big as well if the company’s performance goes downhill due to unforeseen circumstances.

The evaluation of risk-return trade-off will help a leader to weigh in the pros and cons of both risk profiles (considering the team’s risk profiles, ambitions, and loss reserves), seize new opportunities, and resolve complex issues and crises.

When one has better understanding of financial matters, it will result in higher confidence in balancing and managing the various risk attitudes of other members and stakeholders.

This, in turn, will empower them with a culture of trust and accountability.

Being financially responsible

Being a financially responsible leader means serving one’s teams’ needs within their own means; in essence, spending according to their capacity.

Day in and day out, we spend money and many times, we spend what we have not earned; we take loans!

It is then therefore important to know how to deal with the money we have, both earned and yet to be earned.

As illustrated, having a budget is one of the core pillars of financial responsibility. In the process of budgeting, we make decisions as to how we spend our money according to our own needs and wants.

Further to that, finance is definitely a field governed by laws.

What follows is that in each and every financial and commercial matter, there are rights owned to and obligations owed by all parties involved.
To be financially literate, we must also know our rights and duties towards the others.

For instance, consumers in Malaysia are entitled to legal claims for products or services that are misleading or falsely represented.

With this knowledge, we give assurance to our team or organisation as to how we can work as a team within the relevant laws.

Conclusion

Potential leaders should possess thorough financial knowledge and skills which in turn helps nurture other necessary leadership qualities.
It is important for all sectors of society from all disciplines and the government to take the initiative to nurture financial literacy among young people who will become potential future leaders.

Parents, for example, should equip themselves with financial knowledge and skills, so that they can be role models for their children.
A task as simple as taking their children for grocery shopping and involving them in basic transactions and purchasing decisions would be a great start.

Besides that, the government could build educational facilities and syllabuses relating to financial literacy via animation, 3D-games and avatars that resonate well with young people.

Wei Jet is currently at his final year pursuing a degree in Actuarial Science at Sunway University, while Max is currently surviving through his law school. Having completed his penultimate year at Taylor’s University, Max is now in his final year at University of Liverpool, cheering for Chelsea. Both writers are part of Financial Literacy for Youths (FLY) Malaysia, a student-based non-profit organisation dedicated to spreading awareness on the importance of personal finance knowledge and how it can personally empower youth. Get in touch with them by emailing editor@leaderonomics.com.