The importance of understanding finance and economics
By Tony Dong
News Opinion C-suiteA business-first mentality helps close the gap between security and the C-suite
There exists a strong trend today where security professionals of all ages, occupations and career stages pursue continued education whether formally through an educational institution, privately through a certification body, or informally via online resources and personal mentorships.
By far, security professionals do an admirable job enhancing their knowledge of the job and industry.
The number of professionals holding an ASIS International APP/PSP/PCI/CPP designation continues to increase by the day, as does the number of individuals attending security-focused professional graduate degree programs such as the master of science in security risk management offered by the University of Leicester and even the professional doctorate in security risk management offered by the University of Portsmouth.
I’m hoping to make a strong case here for pursuing other avenues of education, outside of the topics commonly explored in security — whether they be crime prevention, systems integration, guard management, business continuity or emergency preparedness.
I am of the opinion that a strong knowledge and understanding of finance and economics will serve as a strategic career differentiator for the average security professional and produce satisfactory returns.
A deeper understanding of finance and economics will significantly enhance your ability as a key decision maker and contributor to the bottom line of the business. The goal of any enterprise is to create and preserve value for its shareholders. Without an understanding of the financial variables that underpin these principles, security concepts are left meaningless, being applied without context or justification in regards to the bottom line.
Without building a financial case for your security proposal, the executive suite will not see you as a business enabler, but rather as a siloed fearmonger and negative outflow of cash with no tangible return realized.
For that reason, it is important for security professionals to understand concepts such as the time value of money (how much is my security plan proposal worth today based on the savings it generates in the future?) and the internal rate of return (which can be applied to predict the annual rate of growth in your department based on any number of years and budget investment).
Some security specific financial ratios include:
- Non-billable overtime / billable hours;
- Non-billable hours / billable hours;
- Revenue / # of employed guards.
No. 1 measures your company’s ability to directly reduce NBOT, often the largest impact on margins for contract security
(are the operational risks that increase NBOT and decrease our margins being properly managed?). No. 2 measures your company’s ability to be efficient with training requirements (are we using our non-billable hours for training requirements as little as possible?). No. 3 measures your company’s ability to derive maximum value from the current employee pool (how much revenue does the average guard contribute to the organization’s bottom line?).
It is also important for you to understand financial statements, including the balance sheet, income, cash flow and statement of shareholders’ equity. This narrows the gap between you and the other members of the executive committee, and gives you credibility when discussing enterprise level risks because you can frame them in the context of the enterprise current financial state.
For example, if I notice on the balance sheet that the company has significant amounts of long-term debentures, deferred tax liabilities and bonds becoming due soon, I may hold off on any proposals for capital expenditure in security for the time being.
Finally, an understanding of economic trends such as cycles, leading/ coincident/lagging indication and inflation will help you become a better strategic planner and optimize your long-term decision making.
For example, construction starts are a common leading indicator of economic activity, signalling any residential/ commercial projects that are slated to begin at the start of any quarter.
By observing and tracking this indicator, you can anticipate the amount of business that could be headed your way. If you know a lot of projects are about to be built, you can safely assume that most, if not all of them, will require security services as part of their insurance coverage, creating an opportunity for you to proactively develop your sales strategy and execute it before competitors.
Other lagging indicators, like inflation, will help you calculate the right increase in bill and pay rates to keep your margins healthy and employees happy. For example, if the inflation rate for 2019 in Canada was calculated from the consumer price index (CPI) to be 1.95 per cent, I should attempt to raise my bill and pay rates by at least this amount, if not more. By doing so, I protect my margins and the purchasing power of my employees’ wages from the effects of inflation, keeping my business profitable and my employees happy.
The security professional of the 2020’s must become a business executive with a security concentration. Whether that means pursuing an MBA, taking a management role outside security temporarily, or pursuing continued education in the financial sector, the goal is the same: to diversify your skillset and differentiate your value as a key hire, hedge your job security against changing trends in the security industry (automation, IoT, mergers and acquisitions), or innovate new ways of doing business, selling services and creating products that advance the industry as a whole. The future is yours for the taking — if you take the time to get educated.
Tony Dong is a student in the Masters of Science (M.S.) Enterprise Risk Management (ERM) program at Columbia University.
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