Financial Information – Do you understand the numbers?
Why is this relevant to me?
Having owned my own businesses for over 15 years, I have come to realise just how important it is to have a ‘handle’ on the company finances. I have had to learn how to interpret my balance sheet, how to produce a profit and loss account and how to produce a cash flow statement etc. Now, you might be asking. ‘Why is this relevant to me? I just work here. I don’t need to worry about the numbers!’ Big mistake!
Today’s leaders have increasing responsibilities, finance being one of them. Your accountant (if you have one), will be responsible for your financial systems. These systems will produce financial statements. Understanding your organisations’ financial statements is a key management responsibility. They hold important information about the organisation’s operating results which is necessary for effective management and financial control.
Financial Statements – what are they?
These statements will help you to identify your company’s financial position. They help to identify where the organisation is doing well and, more importantly, where you might need to make improvements. A manager who can understand their financial statements will be able to make much better business decisions.
The financial statements that you are most likely to encounter are the Balance Sheet, Profit and Loss Statement and the Cash Flow Statement. All of these statements rely on each other, as we need to take information from one in order to prepare the others. Your role as a manager is to interpret these statements. You will also need to understand what they do and don’t tell you.
What do you use them for?
Financial information can tell a story, if you know how to read it! For example, could you look at your cash flow say, for the last 6 months and be able to explain your financial performance? Could you also drill down into the figures to identify potential staffing or performance issues? Maybe there is a problem with one of your clients that you were unaware of. The numbers might warn you about this.
How do you use them?
I use ‘the numbers’ to help plan for the future. Producing a cash flow statement will help me to understand when the money will be coming in and going out. I can use that information to plan our activities. If I decide that I would like to invest in some new equipment; the cash flow forecast enables me to plan when this would be viable. The cash flow statement will also allow me to monitor financial activity and predict potential problems; perhaps one of my clients is falling behind on their payments for example. The information would enable me to manage the situation effectively and before it gets out of hand.
It has everything to do with you!
We also need to monitor how much money we spend and many organisations have an accounts department that will do a lot of the work for us. However if you, like me, are running your own small business, being able to produce this financial information is of paramount importance if you want to survive. We also need to monitor how much money is going out of the organisation, for example in dividends to shareholders. Are they leaving enough money in the pot for the organisation to manage its liabilities and survive? Now, I imagine you are thinking, ‘Why should I worry about the shareholders? This has nothing to do with me!’ It has everything to do with you!
Recent financial scandals
Consider the BHS Pensions scandal. According to the Guardian.com, ‘BHS collapsed into administration in April, leading to the loss of 11,000 jobs and leaving a pension deficit of £571m. Green controlled BHS between 2000 and 2015, during which time his family and other shareholders collected more than £580m’ (https://www.theguardian.com/business/2016/nov/02/philip-green-may-be-forced-to-pay-money-into-bhs-pension-scheme ).
Whilst I am not suggesting that if you were a manager at a large company like BHS you could have prevented this yourself, even if you had access to and understood the financial statements. However you may have been able to raise the alarm to the Pensions Regulator before it got out of hand. As the Guardian Article states, the stakeholders took the money from the company over 15 years without anyone seeming to question them! Putting this into perspective and within your own organisation, if you understood the financial statements, you would be able to spot irregularities and question them before it was too late.
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