When I was a business owner, I had the fortune of being naturally comfortable with financials. So I assumed other CEOs were, too — until I became an advisor. Often, leaders who are amazing at running businesses have little understanding of the importance of numbers. It’s not that they are incapable of conceptualizing financials; it’s that all they have ever focused on is sales and net income.
How wide is this disconnect? During one valuation presentation, a CEO barked that I had mentioned financials twice. He slammed his fist down and said his company would be sold on what it manufactured, not its finances. I’m sure my face registered a look of confusion and shock.
Leaders do want to grow their businesses. A Gartner survey of CEOs found that growth topped their concerns. Yet when asked about the challenges of making gains, plenty of them pointed externally. That’s not the view to take. In the strongest companies, financials and growth work hand in hand.
Demystifying ‘the Books’
Leaders today must know the financials of their companies for the same reason doctors monitor patients’ vitals. How can you solve a problem if you’re unaware of it? Knowing a few key performance indicators about the company’s finances can be crucial for improving its health.
Best of all, CEOs don’t have to track tons of figures. They just need to keep an eye on a few things every month, such as the income statement, balance sheet, and cash flow statement. If something seems amiss, they can find the right person to fix it.
This is less arduous than it sounds. The first step is to identify the most common errors found in businesses’ financial processes and remedy them with permanent proven solutions.
Winning C-Suite Financial Protocols
Want to get a better handle on your company’s financial wellness? Try making a few changes in your current processes:
- Fix overly simplistic financial statements.
Some so-called financial statements are nothing more than summaries. While no one should have an eight-page income statement (yes, I’ve seen this), CEOs should make sure their financial statements have enough information to provide a clear picture of what’s going on. Instead of accepting a basic statement, be sure yours contains enough information to give you a broader view. Talk to your finance person about numbers to track. One Deloitte CFO survey found that 17% of participants thought net profit margin was an important figure to know because it shows cost control ability.
- Ensure financial statements are routinely available.
At my former company, I always had monthly statements by two weeks into the next month. But I’ve discovered that many CEOs don’t see monthly statements until months later. This lag time can cause you to miss opportunities and stop problems. Insist that you receive timely, concise information on a set schedule. This will take a few months to perfect; you’ll have to discuss realistic expectations with your accounting department or CPA. They’ll be happy to help. As one Accenture survey indicated, 67% of people in finance were prepared to train executives in financial analysis, planning, and budgeting.
- Ignore the balance sheet at your peril.
There is as much information to be learned about your company’s financial health from your balance sheet as your income statement. For instance, that’s where you’ll find your inventory information. Many times, CEOs and financial statement preparers fudge this number because of inaccurate inventory counts. This can lead to major imbalances and lowered income, especially because most “fudging” tends to be inflated. Ask your team to keep up with inventory and other matters so everything is accurate on the balance sheet. If you get pushback because your massive inventory can’t be counted monthly, develop a rolling method to get it done efficiently.
- Produce a key financial ratios page.
This might sound unconventional, but I always suggest looking beyond raw numbers and examining key ratios. I’m talking about information such as accounts receivable days, inventory days, payable days, percent of gross profit from sales, percent of cash flow from sales, and daily sales. The key ratios you choose can be industry-specific. For example, our organization tracked cents per gallon. We always put the number of gallons of fuel and lubes at the top of our income statement, right before the sales. This commodity was integral to our business.
- Track cash flow and gross profit margins.
Cash flow is the true lifeblood of your business. You can’t control your destiny if you don’t know it. Keep in mind that your cash flow expectations will change as your company ages and develops. Startups usually have little operations cash flow, focusing instead on investment dollars to stay afloat. Mature companies usually lead with and lean on their operations cash flow. As for gross profit margin, it shows how much remains after paying direct costs for goods. The higher the gross profit margin, the more cents you are keeping per dollar earned. Consequently, you want to see your gross profit margins climb.
Whether you are a newcomer to the C-suite or an old-timer at running a railroad, you can always learn something from your financials. Start looking at them in a different light; they’ll take your planning and proactivity to higher levels.
Written by Terry Lammers, CVA, author of “You Don’t Know What You Don’t Know: Everything You Need to Know to Buy or Sell a Business.”
Originally published on 5/9/19 on CEO World here: https://ceoworld.biz/2019/05/09/find-financials-confusing-heres-how-to-make-them-work-for-you/