Vickie Brown Explains Why You Need to Understand Business Finance and 4 Ways to Start.
Do your eyes glaze over as you scan through the latest financial reports? Are you happy to leave it all to the Finance Director?
If this resonates, there may well be a gap in knowledge and communication that needs to be addressed.
Did you know that you are joint and severally liable and equally responsible for the good financial governance of the company?
I’ll share what I believe is a very common situation in SMEs, and how you can overcome the issue.
Common Issues with Understanding Financial Information
As a Finance Director, I used to believe that my financial board reports must be great. Because when it came to the finance section of our board meetings no-one ever asked any questions. So, my communication must have been read and clearly understood by everyone, right?
Not necessarily!
During my studies for the Chartered Director qualification, I was surprised by the lack of understanding of standard financial information amongst non-Finance Directors.
As the exceptionally bright, high-achieving board members from a number of different industry
sectors shared their thoughts, some of the phrases that stuck in my mind were,
“We leave that up to the finance director; it’s their responsibility…”
“I don’t want to ask questions and appear ignorant…”
“Cashflow is just another way of showing profit, isn’t it?”
“I understand the profit and loss statement, but why do I need to know about the balance sheet?”
“Finance is like a dark art…”
Sound familiar?
I suddenly realised that it was possible that, rather than understand and agree with every word of
my finance report, some of my own (highly skilled and very intelligent) board might be feeling less than confident when presented with page after page of financial information that made up my board report.
Honestly, it was a real epiphany for me, and one I knew I needed to act on.
How to Help Your Board Better Understand Financial Reports
To tackle this issue, I took a number of approaches, which I recommend you put in place too.
- I ran a brief workshop for our board to give them a better understanding of the financial statements. Particularly around the balance sheet, cash flow, and working capital cycle. I explained that we were joint and severally liable and equally responsible for the good financial governance of the company (which came as a bit of a shock to some and certainly focuses attention).
- Have re-written my board reports to make them easier to read and understand the implication of the numbers.
- I now sit with each board member individually in advance of the board meeting to go through the detail. Including explaining the figures, and answer any questions (none of which have ever been stupid).
- We spend as much, if not more, time in the board meeting discussing working capital, leverage and the cash flow implications than we do profit.
I highly recommend this approach to my peers in finance. Rather than assuming we’re all on the same page, I feel safer in that knowledge that the work has been done.
Don’t Be Intimidated by Finance
My message to you is, don’t be afraid of the figures. They are just another tool to help you run the business. But you need to understand them.
There is no magical art to finance (I feel like I’m revealing a big secret here).
The financial statements can appear complicated initially. But once you understand what they are used for, they can really help you judge the financial health of your business and the levers you can pull to improve your cash position.
If you don’t understand something, ask, and keep asking until you get an answer that you
understand.
A finance professional that doesn’t embrace being challenged on the numbers is a
danger to your business.
As Einstein once said, “If you can’t explain it simply, you don’t understand it well enough”.
So please, talk to your finance director – I bet you’ll be surprised how human they can be!
If you need any assistance with tackling this issue and putting a plan in place, or other elements of Finance & Strategy, get in touch.
Vickie Brown is Chartered Director, NED of Sheffield Chamber of Commerce, Vice Chair South
Yorkshire IoD and Consulting Partner at Inclusive Consulting.
