Why All Directors (Not Just the FD) Must Understand Financial Reports

Below Vickie Brown, Chartered Director and Finance Director at Distinction Doors Ltd, explains for CEO Today.

I started to think about this a couple of years ago when I commenced on my journey to qualify as an IoD Chartered Director.

The first stage includes a module called Finance for Non-Finance Directors. Luckily for me and my board I was fine with the course content, however the experience of attending the module gave me real food for thought.

Epiphany

As the course unfolded, my cohort of fellow directors from successful firms in varying sectors began to open up about their own concerns.

It was apparent that these intelligent, high-flying individuals were very wary of questioning the financials for a number of reasons:

• They thought it was the sole responsibility of the finance director
• No-one had explained the financial statements prior to them being promoted to the board and they thought it would show a knowledge gap
• No-one wanted to ask a question that might make them look foolish

It was a revelation when I realised it was quite possible that my own, highly skilled and very bright board members were not as confident as I had thought with the page after page of financial information I had been presenting to them. Perhaps the lack of questions was not because my reports were perfectly understood…

Time to make a change

On my return, I ran a brief workshop for the board and senior management to give them a better understanding of the financial statements, particularly the working capital cycle, cashflow and balance sheet, and how we could impact each aspect.

I explained that we were jointly and severally liable and therefore equally responsible for the good financial governance of the company. Any legal claims could be made against any member of the board (generally those with higher net worth – that made people take notice!)

Since then I have rewritten my board reports to make them more accessible and easier to read, which helps my board to better understand and interpret the numbers. I focus on the key figures that impact our business – not just profit, but also the amount of debt in the business and where our cash is tied up as working capital.

The finance section of our board meetings are certainly much livelier now, with lots of questions (I can assure you no-one has managed to ask a silly one yet) and much discussion and debate. Everyone is involved, which has to be better for our business.

Know your numbers

The message I’m trying to give here is make sure you and all your fellow directors understand the numbers.

However mystifying it may appear initially, there really is no magical art to finance.

While balance sheets are a more complex concept than the profit and loss account, they are arguably more important. It is perfectly possible for a company to show good sales growth and profitability but still become insolvent. You need to keep credit terms to customers, credit with suppliers and investments in stock or plant and equipment under close scrutiny.

You only run out of money once!

So, let me offer the following advice

• Go through your working capital and get a good grasp of the levers that you can pull to improve your cash position.
• Get friendly with your bankers or investors – they are experts in raising finance if it’s required. Don’t hide from difficult conversations and make sure they truly understand your business. They will be in a great position to help you navigate through choppy waters, but if they don’t know your business they can’t assist.
• If you don’t understand something in the accounts, ask, and keep asking until you get an answer that you truly understand: a finance director who doesn’t embrace being challenged on the numbers is a danger to your business.
• There is nothing wrong with asking for additional training, I truly believe in life-long learning, and there are numerous courses out there to help you understand your numbers. As a director or senior manager it makes good business sense to ensure that you are trained in the basics of finance.
• Create a culture where you are accessible to your workforce. If there is something untoward in the finances, people in that team will know. Would they feel comfortable to come to you with any concerns?
• Do you know who your auditors are? Do you have an audit committee? Auditors should be seen as allies to the company, there to give an independent view on the performance. As they may get complacent over time, good governance would be to change provider every few years.

So go on, take some time to get to know your finance director, you might find out they’re human too!