While product managers are not required to have the in-depth knowledge of accounting that their finance stakeholders and counterparts do, it is worthwhile to have a good understanding of financial principles – to both increase competency and fluency, and to affect product strategy. Depending on the organization that a product manager is in, they may also need to build business cases for new product investments. And at some point, maybe a product manager wants to break into the rapidly-growing Fintech industry. Regardless, financial literacy can help a product manager in a couple areas.
Product Managers need to understand their contribution to an organization’s success
Understanding how the product contributes to an enterprise’s revenue, expenses, profits and cash flow provides the context that a product manager needs to see how their product might be prioritized at the enterprise level. Most companies have multiple products that are competing for resources, so that context is important. And financial acumen enables Product Managers to align their product strategies with the broader financial goals of the organization, creating a better aligned relationship between product development and business objectives.
Product Managers can get insights from competitors’ finances
Understanding competitors’ performance and trends can help a product manager orient their product in the marketplace. For public companies, there is much useful information in the public filings that must be disclosed. This can help create a picture of where competitors are investing and what their product roadmap could look like.
Product Managers need to speak the language of decision makers
Understanding how decision makers in an organization speak - in terms of how a product affects revenue or expenses or what a feature’s ROI is - gives credibility to a product manager. It unlocks better conversations with stakeholders and executive leadership, whether those conversations are around budget approvals, resource allocation, or strategic partnerships. This can help a product manager secure what's necessary for the product's success.
Financial Terminology to know:
Revenue - Also called "sales" or "income," revenue is the total amount of money earned from selling a product or service. This forms the top line of the income statement.
Cost of Goods Sold (COGS) - All the direct costs associated with producing or delivering a product or service. This includes materials, labor, and manufacturing overhead.
Gross Margin - Gross margin is the difference between revenue and COGS. It is one of the most important numbers in finance, guiding pricing and profitability decisions. It’s also used to evaluate a company’s profitability and efficiency in producing and selling its products.
CapEx (Capital Expenditure) – Upfront investments that provide value over the long term – most often tangible items like facilities, equipment, but also can be things like research & development expenses or enterprise software. CapEx appears on the balance sheet and is depreciated over the years that asset is in service.
OpEx (Operating Expenditure) – Ongoing costs required to run the business day-to-day. This is expenses like employee salaries, marketing spend, subscriptions, and utilities. OpEx hits the income statement immediately as the costs are incurred.
PM Note – whether a proposed project uses CapEx or OpEx spend can impact how it is funded and when it is scheduled. Knowing what you need and when can help secure buy-in from Finance.
Net Present Value (NPV): The difference between the current value of cash inflows and outflows over a period of time is known as Net Present Value. The NPV is a calculation used to determine the feasibility of a proposed investment or project.
Return on Investment (ROI): This is a classic financial metric measuring the payoff of an investment. ROI calculates the net profit or cost savings relative to total dollars invested.
PM Note - Product managers rely on ROI estimates to build the business case for features or products under consideration. Prioritizing ideas that deliver the highest ROI ensures efficient allocation of engineering resources.
Profit and Loss (PnL): The profit and loss statement is a financial statement that summarizes sales, expenditures, and expenses over a specific period, usually a fiscal quarter or year.
Break-Even Point: A break-even analysis determines the point where revenue equals total costs, resulting in no profit or loss. This calculation tells you when you might start making a profit.
Payback period: This represents the amount of time needed to recoup an investment through its generated cash flows. It’s a metric emphasizing speed of capital recovery from investments.
Amortization / Depreciation: Both are calculation methods that smooth out expenses over time on a balance sheet. Amortization is a method of calculating the expense (cost) of an intangible asset that reduces in value over time. Depreciation is expensing a tangible (fixed) asset as it is used.
Earnings Per Share (EPS) - The portion of a company’s profit allocated to each outstanding share of common stock. EPS is a key metric for investors evaluating financial performance and impacts shareholder confidence and valuation.
Financial fluency, similarly to good negotiation skills, is a necessary tool in a product manager’s toolbox. Financial insight is key when exploring new markets or strategic shifts, ensuring decisions are not only innovative but also financially sound. And all that contributes to a more effective product strategy.
STAND-UP EXERCISE
Product Managers should learn more about how to read financial statements – balance sheets, cash flow statements, and 10-K filings. Then the PM should build a rough estimate of their product’s revenues and expenses.
To begin:
- compile known operating expenses like development costs, sales and marketing costs, plug-ins/subscriptions, etc.
- check with the finance team if there are additional allocations to the product line (for example indirect costs from HR, IT, etc.) that you might not know about
- compile the product’s revenue using existing income statements or PnL statements, or additional analysis of product metrics
Once the PM has a rough estimate of a product’s revenue and expenses, review it with the product team. Ask the team to project what future financials might look like given assumptions or trends or market information. If everyone on the team can be speaking the same language in regards to the product’s financial impact and viability, it contributes to a more unified overall product strategy.
Extra credit: Look into your competitor’s finances. Project their future and see how you stack up.