How to sharpen financial competence for directors and executives-3

CAUTION:

While all the above (and others) may prove useful, the idea is not to micromanage and get bogged in deep financials. Keeping it simple is the message. I believe if boards can set criteria through Executive Policy Development from the onset, keeping it simple yet covering all financials of your organization is the way forward. Subsequent monitoring of the financial health at appropriate intervals will help you shape your organisation’s financial strength further. After all, it is all about accountability at board level.

 

 

How to sharpen financial competence for directors and executives-2

The solution:

The following are some of the steps that key decision-makers need to take in order to assist the company in building a more competent and more effective financial management infrastructure.

1)      Your executive Finance team: To have a financially competent executive team; YOU NEED A TEAM; there is ALWAYS an inherent danger in leaving major financial decisions to a few individuals.  The fact is that we are talking about money; and when that is the subject then many times self interest replaces corporate interest in the decision making hierarchy.  Furthermore a company that has a properly chosen team of individuals to make decisions provides a system of checks and balances which mitigate the risks associated with these decisions.

2) Training Courses in Finance: Another conduit would be to get a day or two day workshop in financial training where current decision makers receive tutelage in financial decision making from an application standpoint instead of an academic or theoretical standpoint.  Bringing in people that have a history of being competent financial managers will be helpful.  But also teaching examples of how poor decisions have destroyed companies would be helpful as well.  Many course offer sound coverage of financial topics of importance. However, it is important to check background, experience and credentials of the trainer before embarking on a course.

3) Get a Coach or Corporate Consultant: Coaching at executive level has proven to be popular in many parts of the world. Experts believe that the value an executive coach (whether it is a successful consultant, former executive, or entrepreneur) adds, significantly impacts progression and drives performance to a higher level. There are many coaches available but you need to ensure you get a coach who will listen to your concerns at the same time offer the right and relevant professional advice. With the advent of the internet, organizations also offer virtual coaching support.

4) Have self-analysis meetings: At least once a year all organizations should seek to have a meeting with all people involved in the financial decision making process (executives, senior financial/accounting personnel, board members, etc.) and simply have a brain-storming session that focuses on the direction of the organization; future financial needs, current financial position, etc.  These meetings have a way of bringing issues to light that otherwise would stay in the dark; and furthermore you want all of these people to work well with each other, and this is a good platform to start from.

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While most organizations believe that the decision making aspect of their financial infrastructure is at least competent; the fact is that many organizations aren’t aware of what constitutes competence as it relates to financial decision making.  The fact is that, no matter where your organization is located, the WORLD HAS CHANGED for companies; to stay prosperous companies must focus on sustainability and not luck; they must focus on consistency and not major peaks.  Financial competence has little to do with an education in finance, it has everything to do with how your executives can use that information and analyze the health and the future of the organization.  Those that understand this are in an advantageous position; those that don’t are playing with fire.

 

 

How to sharpen financial competence for directors and executives-1

Financial competence is not a static variable, in that it is something that is ever-changing, and the skills associated with being financially competent must be sharpened consistently.  The fact is that failure to have financially competent decision makers can be highly destructive to an organization.  What is meant by “financially competent” goes well beyond being able to identify credits or debits or being able to properly read financial reports. Being financially competent should focus on one’s ability to break down the financial information provided in those reports and analyze how they should be used to determine the financial path of the organization going forward.  Furthermore, a person must be able to understand how risk factors into the financial decision making matrix and how that risk should affect the courses of action taken by the company.  These are the things that separate competent financial management from incompetent financial management.  This is likely a major reason why roughly 21%[1] of all CEOs serve in a financial oversight position prior to becoming a CEO and why almost a third of CEOs have served in a financial capacity at some point in their careers.

It is also important to realize that the outcome of certain situations has no bearing on the competence of the decisions that have been made.  The fact is that poor financial leadership can still yield success from a periodic standpoint.  In the same manner that an unskilled Poker player can have a run of “good luck” and win big in a night of gambling, so to can incompetent financial managers “GET LUCKY”.  The problem with depending on luck to manage the financial infrastructure of an organization is two-fold:

1. Luck does; and will always run out at some point in time
2. Financial management isn’t gambling; especially when considering what’s at stake whether it is the shareholders, the market, the employees, or the customers; there is simply too much at stake to make financial management a “Coin Flip”

To ensure that the key decision-makers are financially competent it is incumbent upon management to analyze the knowledge of these individuals and provide opportunities for them to update and hone their skills as it relates to financial management.  The good news is that most organizations generally select the financial decision-makers within their organization by doing a thorough search; this generally allows them the opportunity to select the person that they feel best can handle the position.  Furthermore, most organizations that utilize committees to help manage operations have a financial management committee (as it is considered to be the most common among companies with three or more committees).[2] The problem is that many companies don’t understand the position enough to fully handle this search, so they end up hiring people that have had past success without determining whether the source of that success was luck or skill.

If the current global economic calamity has taught us anything; it has taught us this: When the economic climate is advantageous to organizations it is much easier to seem competent than when things go bad.  In a good economic climate decision-makers can take huge risks and if they win they are superstars; if they lose there are generally opportunities to mitigate that loss (either by acquiring debt capital; increasing sales, or raising equity funds just to name a few).  In a bad market we have discovered that THE SAFETY NETS ARE GONE; and risky decisions have real consequences.  In this market we are finally paying the price to learn that there is a real difference between corporate sponsored gambling and effective financial management.  What we need to do now is train current and future financial decision-makers about what makes an executive financially competent, and what does not.  This will produce more effective financial decision-makers and more importantly it will provide a future asset for companies that will assist them in diverse market situations; NOT JUST WHEN TIMES ARE GOOD.

 

Avoiding financial failure from a director’s lens-3

Boards must constantly seek to find out the reasons underlying a particular action. They need to know why a new financial product has been misaligned.

In conclusion, boards must be fully engaged in linking long term strategies to what is happening currently. This can be achieved if all board members have conducive ground which is aligned in such a manner, that any knowledge gaps are fully covered through synergy.  Risk management and corporate financial health have proven to be central in majority of board meetings. If Board behaviour, values and culture matters are built on the true purpose of your organisation, many irrelevant time taking tasks will be eliminated bringing out best practice amongst board members. This can be done by crafting the right policies using the right words which are rich in meaning yet simple to understand. Having monitoring reports which comply within workable parameters as reflected on executive policies, is basically the construct of a much needed framework for boards globally. The sequence of lights, cameras and action as far as boards are concerned is, craft executive policies ahead of time allowing and empowering management to function as effectively as possible and finally monitoring what has been executed.

 

 

 

Avoiding financial failure from a director’s lens-2

So, how can boards get the sequence of Lights, camera and action in the correct order? The areas covered will give potential directors a basic grasp of what needs to be done and how to accomplish these.

Understanding financials: One of the key talents which any director must have is their ability to make correct sense of the financials. By simply understanding the key reports which include Profit and loss (Income statement), Balance sheet and cash flows will provide the level of insight into making your business grow.  There are certain spots which can easily be picked up just by looking at the figures. A large purchase or a material stock figure are board level concerns and reasons for any variations are perfectly valid for a board member to know. Sharpening executive competence in financial competence is no longer a fashionable issue but is a necessity for the success of your company.

Tying up long term coordinates: As you educate your self in financial knowhow, it is equally important to tie it with long term strategy documents that you have. In other words, are the financials in line with the targets? Has the right mixture of resource being used in order to get the right combination set in the forward statements? Do the financials tell a story deep enough to bring out the comfort needed to ensure that proper controls are in place? These few questions will immediately build the bridge as to whether the financials match with overall corporate performance targets.

Risk Management:  This has become a hot topic especially after the recent global crisis. It is much heard in everyday meetings in companies globally. So what has this to do with the financials? Well! The proof is in the pudding. Look at any company which was limping during the financial crisis. Citibank posted huge amounts of write offs in a single year which proved to be the highest in the history of Citibank. If you look at some of these financials, knowing that they have some of the best financial experts, they still got it wrong. Having an audit committee or risk committee is useful but not enough. Board members must be able to ask the right questions relating to risk matters and many of these can be picked up from financials. If you look at these deeply, you will realise that there were many financial instruments but what happened behind the curtains was left mainly to chance. Having the right linkage between risk and financials creates fewer road bumps. A high exposure to risky vehicles in your financials will have significant impact to other stakeholders. Careful consideration of what is happening not only internally but externally will bring in better discipline and focus.

Being on the same page: Probably a key weakness with many boards are that they are not always aligned with the discussions being held. This is difficult to achieve in the short run but having governance and an expert management coach would help in ensuring that the board is on the right track. I have witnessed tremendous energy drains amongst directors in coming up with the right consensus. The core problem was the level of collective understanding of the basic systems and processes of an organisation. Being power driven or commanding with an attitude are the results of future downfalls as it does not add value to the entire executive process.

Crafting Financial Policies from inception: Taking time to construct easy to understand financial Policies will form a strong guideline. These Policies must be owned by the board but management or outside experts may help in the process. The whole purpose is to attempt to encompass all areas of financials covered through simple yet powerful Policies. In our training programme, we have 4 simple yet powerful financial policies and this is all it would take. A more complex organisation may need a couple more but the story these policies tell has multiple benefits to companies all over. One of the biggest benefits is having a cohesive understanding amongst directors. This alone is the single most challenge which organisations face. It is good to have constructive criticism so long as it is correlated to the policies your organisation has. Nothing should be left to chance or patchwork and incremental  burdens to the board. These policies should be designed to accommodate new changes as and when they occur.

Monitoring reports: Anything which needs attention needs monitoring. The financial health of an organisation must be monitored with acceptable frequency dependant on your organisation. If these reports are well constructed by management and presented to the board, it would provide the right fuel needed for discussion. Again the CEO will take responsibility of presenting these reports and the board will be the ultimate decision making body. No individual can influence such a report as it forms part of company documents. The monitoring is not about management reports , but what has been written in the Policies. All issues which include asset protection, performance, budgets , cash and so forth should be part of the policies and these would eventually be monitored. The board may decide to accept these or may want an outsider to give an independent opinion or a director may scrutinise documents himself. Whatever the mode, the purpose is to ensure that financial stability of the company is maintained.

Commitment, discipline and taking action: Boards must reach consensus within given timeframes. Some boards have items on the agenda which keep spilling over. This is not a healthy situation. Constant clean up and correct level of execution must be implemented by boards. In order to do this, the board needs to clarify and identify exactly what the situation or item is. If it requires a third party response, what are the follow-up mechanisms? By changing an approach, would that help the situation? If not what are the alternates? The attempt of constantly looking for answers will soon freshen up the outlook of your agenda.

These 5 points offer to help boards become more effective. If these rules are applied consistently, I believe your organisation would not face a difficulty in financial understanding.

 

Avoiding financial failure from a director’s lens-1

Lights, camera and action. This would be the normal sequence when shooting for a scene. The same rules should apply to the corporate world when making decisions. The problem is the sequence has been missed and so often, directors and executives tend to take action without lights or preparing the camera. Look at the recent crisis and it is no surprise that the financial mark got missed out.

In all companies, finance is the key and without proper and adequate financial management, companies tend to fail. Many principles and systems are available but the problem is that the top level executives simply don’t get it right often. They look into financials without having a good grip of what financials are all about.

This article is prepared with the intention of offering directors and executives how to detect value drivers and avoid smokescreens without micromanaging. It is planned with the intention to further offer suggestions on how to make savvy decisions and apply a balanced leverage approach. In order to do this, directors must first be able to see dark spots in the quickest possible manner.

One big challenge is the different types of reports as well as keeping track with targets. Going through heaps of reports and figures may sometimes prove to be a huge task. Information overload is one burden which boards face but more important is to understand relevant reports and make useful decisions from these. Historically information may seem obsolete for many, but with good financial governance, directors would be able to use the information to gain more confidence, more courage and able to detect future trends with a high degree of certainty.

 

Financial Management: Financial literacy for decision makers-2

It is important to understand that the key decision makers within organizations all over the globe are trying to stabilize financial operations on the fly without the benefit of any tried and true methodology.  The fact is that this is one of the largest global recessions seen in the lifetimes of any of those decision makers, so the focus must be on retraining how we manage the financial infrastructures of our companies.

 

Taking a scientific approach to this will include:

 

• Analyzing the current financial infrastructure of the company
• Determining key decisions that need to be made to transform the infrastructure into a sustainable one
• Locating people who are well versed in risk analysis, portfolio management, operations, and investments to assist your team in developing a cognitive and logical operating plan
• Determine what your resources are, analyze whether they present long-term solutions, or short-term stopgaps
• Build alternative scenario models to determine the effects of making aggressive or conservative decisions
• Build contingency models that will prepare you for multiple situations
• Build financial disaster management models that take catastrophic situations that are PLAUSIBLE in the current climate and build plans for the company surviving (THINK ABOUT THE GLOBAL AUTO OR BANKING INDUSTRY IN 2007; WHAT SHOULD THEY HAVE SEEN, AND WHAT TYPE OF PLANS SHOULD THEY HAVE HAD)
• ABOVE ALL – REMEMBER THAT DISASTER CAN STRIKE ANY COMPANY, AND YOUR ABILITY TO BE PREPARED AND SUSTAIN OPERATIONS DURING THESE DISASTERS IS WHAT WILL DETERMINE YOUR LONG-TERM SOLVENCY

 

These aren’t all of the answers, but the goal is to get you thinking about how things have changed and how your ability to develop and maintain a sustainable financial infrastructure for your company will determine your company’s ability to succeed long-term.

 

 

 

Financial Management: Financial literacy for decision makers-1decision making tools,exploring corporate strategy,board responsibilities,tools for business decision making,corporate performance management,management succession planning,financial accounting tools for business decision making,accounting tools

In a NEW GLOBAL ECONOMY where companies must place increasing onus on how decisions are made, the element of risk associated with those decisions, and the ability to create contingency plans that allow companies to “hope for the best, but plan for the worst”, financial management must be a major element of everyday operations for all organizations.

 

The problem is that many companies still use an antiquated approach to financial management that puts them in a risky position in both the short term and the long term.  While surveys show that 55% of companies site the need for stronger financial expertise, the fact is that number should be more like 90%.  This in no way infers that existing financial experts are incompetent; what it infers is that most companies require more people than they currently have to handle financial management initiatives.

 

The fact is that access to capital is tight, and IT IS GOING TO STAY THAT WAY for the foreseeable future; shareholders are nervous, sales are instable (almost across the board), and financial safety nets (be it a commercial line of credit, private debt, shareholder investments, Private Equity, or Venture Capital) are harder to maintain than they have been in decades.  With all of these changes it is unreasonable to assume that the financial practices of the last two decades will suffice in the current economy; and that means that companies will be forced to change the way that they handle financial management initiatives.

 

 

The tale of the tape: Financial Statement Literacy for Directors & Executives -3

A very simple overview of the financial reports would focus on the three primary reports that are produced by all organizations:

1. The Profit and Loss Statement – This report is used to detail the operational activity of the organization, and is a great barometer of how the company is doing from a sales position, market penetration perspective, capital responsibility standpoint, a costing standpoint, and an overall efficiency standpoint.  As it relates to the derivatives of this report the following are some of the most common outputs:
   1. Sales
   2. Sales Efficiency (Through an analysis of Gross Profit or Net Sales)
   3. Operational Expenses
   4. Key Expenditures
   5. Tax Position
   6. Profitability

1. The Statement of Cash Flows – This report does EXACTLY what it says it does; analyze how and where cash is flowing in and out of the organization.  While it may not get as much publicity as the Profit and Loss statement or the Balance Sheet; this report can easily be referred to as the most important when analyzing the financial health of an organization.  Cash is the life source of any company; without it YOU ARE DEAD.  Regardless of whether your sales are strong or weak; whether your assets are appreciating or depreciating, whether the company is profitable or not; without cash the company is NON-EXISTANT.  From a corporate strategy standpoint or a corporate decision standpoint, this report will guide how decisions are made and how aggressive the company can be from a growth standpoint.  The key outputs relating to this report include:
   1. A/R Effect on the Business
   2. Effect of Debt on the company
   3. Liquidity
   4. Relationship between cash and profits within the organization
   5. The amount of actual cash that has been derived from ALL business activities; not just Operations.

1. The Balance Sheet – This report simply provides a fundamental understanding of the net worth (from a purely mathematical perspective, not taking opportunity or potential into consideration) of the company for all stakeholders through an analysis of assets and liabilities.  The importance of this report is that it allows everybody from the board of directors to the executive team the ability to take an objective look at the company from a valuation and vulnerability standpoint.  The key outputs relating to this report include:
   1. Value of all assets; physical and proprietary
   2. The useful life (from a financial standpoint) of all applicable assets
   3. The liabilities of the organization
   4. The value of debts (both owed and receivable)
   5. The abstract valuation of the company from a shareholder perspective

While all of these reports show more than what is listed above; most of the other information can be derived from one’s knowledge of the above stated outputs.  From a literacy standpoint; the primary goal should be to develop an understanding of these basic outputs; from there (with consistent exposure) most reviewers should be able to quickly be able to acquire the necessary information from these reports; and more importantly they will understand the “why”; which provides a much more stable analytical base as it relates to financial management.

 

 

The tale of the tape: Financial Statement Literacy for Directors & Executives -2

To initiate this process a reviewer must determine why they are being asked to analyze the financial reports of the organization.  Generally speaking these tasks are ongoing (in that they will be asked to review these financial documents on an ongoing periodic basis), and they fall into one of the following categories:

1. Reviewing the Financial Reports for inaccuracies
2. Reviewing the Financial Reports to ascertain the financial status of the company or an individual department
3. Reviewing the Financial Reports to determine operational bottle-necks that are negatively affecting the financial output of the organization or department.
4. Reviewing the Financial Reports to Determine or Analyze key ratios (i.e. inventory turnover, liquidity, gross margin, profitability, Marketing ROI, capital burn rate, etc.)
5. Reviewing the Financial Reports as a way to evaluate key personnel or key programs

To effectively obtain the pertinent information necessary for the above; a person must have a thorough understanding of what is provided in each financial statement.  Having this understanding the reviewer is more apt to understand where each piece of information is located, and more importantly they are more apt to understand why the information is located in that particular report.