Over the past three decades, I have had the privilege of working closely with hundreds of small-business owners and CEOs. I have enjoyed this immensely and have learned much about their similarities and differences. Unfortunately, one similarity that is far too common is a fundamental lack of financial and accounting acumen.
Most small-business leaders have emerged from the ranks of startup entrepreneurs. They have developed a business out of the garage and have put heart and soul into their product or service, which is absolutely appropriate.
That said, this often leaves a blind spot and vulnerability when it comes to the financial side of the business. While all leaders know that it is essential that their business makes money, they often prefer to leave the accounting and financial functions to the “bean counters.”
In a CEO Forum years ago, one client responded to the challenge of sharing his financial statements with his fellow business leaders. Most who participated that day were unresponsive to what he shared. However, one of the more seasoned leaders, Franklin Quest CEO and future U.S. Senator Robert F. Bennett, asked some pointed questions regarding what the financials portrayed. Bob was kind, but persistent — and it became clear that his fellow CEO did not understand his own financial situation.
As I left our forum that day, I realized that I had incorrectly assumed that my clients had the education and experience to understand and utilize their financial statements. I immediately set about finding how pervasive this problem was. What I discovered was quite unsettling. Out of around 40 clients, only four were what I would define as “financially literate.”
This is not to say that any of them were unintelligent. They were all exceptionally bright in their respective fields, but most had only a smattering of training in finance and accounting. And, once in a position to do so, they gladly delegated the responsibility for these functions to others. Often, this was more like abdication than delegation.
Although much has changed about how business is done over the years, this problem has not diminished. Today’s small-business owners and CEOs still, by and large, have inadequate financial skills to effectively lead their businesses. For this reason, I developed a training and coaching workshop I call “Demystifying Key Financial Concepts for Business Owners, CEOs, and Executives.” It is financial training for non-financial leaders.
This workshop focuses on where financial outcomes fit within the grand scheme of running a successful business, why it’s critical that CEOs understand and share key financial metrics with their team, and specific insights from the key numbers and documents that constitute the language of business.
In introducing this workshop to my clients, I have often found them to be less than enthusiastic about participating. I have learned that no one wants to admit that they don’t understand their numbers. They seem to feel that it is an indictment that they haven’t learned these things along their way to the CEO’s chair.
With them, I share the Bob Bennett story. It is far more embarrassing to be challenged by others who inevitably will review your financials than to admit that you may still have some things to learn. At some point, those statements will be your report card with shareholders, bankers and the tax man. Better to be forearmed with a basic understanding of these key documents.
That understanding begins with recognizing that financial outcomes are the ultimate “lagging indicators” for any business. They reflect how well you have recognized and satisfied the needs of your customers through the operations of your company, which are a function of the competency and engagement of your people. All of this relies on your compelling vision for the business.
This puts the CEO’s understanding of finance and accounting into perspective. Our goal is not to have him or her wear the hat of the CFO. Rather, it is to be able to articulate how financial outcomes relate to the strategies and operations of the business.
Lagging financial indicators include your balance sheet and key ratios that can be compared internally to prior-period numbers, as well as industry comparatives, income statements and related ratios, your cash flow statement and your cash conversion cycle.
An understanding of these fundamental statements will forearm you for several important conversations that every CEO should be having regularly. These include chats with your accountant every time the documents are updated, reviews with your key executives and meetings with shareholders and bankers.
I encourage you to objectively assess your financial and accounting acumen, to recognize where you need additional training and to take steps to bridge that gap. The small investment in time and money to do so will return huge benefits as you lead your company.
Richard Tyson is the founder, principal owner and president of CEObuilder, which provides forums for consulting and coaching to executives in small businesses.