I recently undertook a professional leadership qualification that included a module on finance for non-finance directors. Feeling curious, I decided to waive my exemption and sit-in.
I’m glad I did; I learned so much from the other people on the course that I have since been able to apply.
I was understandably relieved to discover that the course itself didn’t teach me anything about finance that I didn’t already know. However, I was struck by the lack of confidence or understanding of the standard financial information shown by the other attendees – all of them directors.
Until that point, I had honestly believed 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? Well, not necessarily.
As the course continued, my cohort of exceptionally bright, high-achieving board members from a number of different industry sectors slowly began to open up.
‘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…’
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.
Time for Change
It was a real epiphany for me, and on my return I immediately ran a brief workshop for our board to give them a better understanding of the financial statements - particularly around the balance sheet, cashflow 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 focussed attention).
Since then, I have re-written my board reports to make them more accessible, as well as 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, explain 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 cashflow implications than we do profit.
A message to board members: if in doubt...
It’s important not to 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 who doesn’t embrace being challenged on the numbers is a danger to your business.
Vickie Brown is a Chartered Director and Finance Director at Distinction Doors Ltd, a manufacturer based in Barnsley, South Yorkshire.
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