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Why Security Executives Need to Learn Finance & Economics

Tony Dong

There exists a strong trend today where security professionals of all ages, occupations, and career stages choose to pursue continued education, whether formally through university, privately through a certification body, or informally via online resources. Some of these professionals are executives, perhaps stagnating at a plateau in their career where their ASIS CPP designation is simply not enough to convey the legitimacy and familiarity with business management and commerce the rest of the C-suite outside the security profession demands. I am of the opinion that a strong knowledge and understanding of finance and economics will serve as the strategic career differentiator for security executives 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 with 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 fear monger and negative outflow of cash with no tangible return realized. For that reason, it is important for security executives 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 its related principles of present/future value, discount rate, and cashflows

Some security specific financial ratios I have worked with include: 

  1. Non-billable overtime / billable hours. This 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?).
  2. Non-billable hours / billable hours. This 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?).
  3. Revenue / # of employed guards. This 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 key financial statements, including the balance sheet, income statement, cash flow statement, and statement of shareholder equity. This narrows the gap between you and other executives, and gives you credibility when discussing security risks because you can now 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 interest payments becoming due soon, I may hold off on any proposals for capital expenditure in security for the time being as the CFO will have more pressing needs to attend to. 

Finally, an understanding of economic trends such as the business cycle, leading/coincident/lagging indicators, 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 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. For example, 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%, 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 employee’s wages from the effects of inflation, keeping my business profitable and my employees happy. In the bigger picture, I am ensuring that my business stays strategically aligned with the changing macroeconomic conditions and on par with, if not ahead of competitors. 

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, differentiate your value as a key hire, hedge your job security against changing trends in the security industry (automation, IoT, mergers & 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 – but only if you take the time to get educated.

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