CEO’s hide a dirty little secret; many of us simply are not as good “with the numbers” as we’d like to be. And we make things worse by avoiding the issue. We’re quite open with our shortcomings in marketing, sales, human relations and operations, but we tend to change the subject anytime the discussion threatens to expose our financial shortcomings.
As a result, many CEO’s are running blind. We catch the easy “daytime” stuff, like monthly income and monitoring our checking account balance. But we have trouble seeing the other issues – the “nighttime” stuff that can kill us in a heartbeat – because we never learned to see in the dark. The result is that we get ambushed by numbers that have been staring us in the face for months.
Here are 5 things every CEO can do to develop his/her night vision goggles:
1. Understand the Basics – Most CEO’s know how to use the income statement; however, fewer truly understand how to read, interpret, and use the balance sheet and, even more important is the statement of cash flow. These, often overlooked reports, give you the bigger picture as they do not just report on one period of time like the income statement. When used properly, they can also help detect fraud.
2. Financial Tools – Your financial statements should be tools that allow you to run the business and make decisions proactively. They should be reliable, timely (within 10-15 days of the end of each month), and tailored to your industry, stage of company, and goals for the future. They should compare you to others in your industry, provide benchmarks, and report on KPI’s (key performance indicators).
3. Budget – Every CEO should have a budget that is designed to protect the bottom line. Many CEO’s do not do a budget because they know that everything will change anyway and, therefore, it is a waste of time. This is the reason to do a budget… because everything will change! Those changes need to be filtered through a system to determine the impact they will have on the bottom line, cash flow position, or shareholder value. The budget, when done properly, becomes this valuable tool.
4. Managing Cash Flow – Cash flow is everything to a growing company. Cash flow should be monitored weekly, monthly, and projected out 90 days in advance. It is important to ensure that cash is being put to work in the organization to produce the highest and best return possible. Operating cash generated from the business, for example, should not be used to buy longer term equipment unless there is a financial strategy to support this decision. In addition, the banking relationship should be carefully monitored to ensure the organization is getting the best value of the relationship.
5. Tax positioning – What is worse than paying taxes is having to pay interest and penalties on top of the taxes. This situation is avoidable with proper planning. In addition, there are many things that can be done in the organizations accounting records to reduce tax liability to the owners. Organizations with multiple entities need to give careful consideration to corporate structure to make sure they are taking advantage of all tax strategies they can.
Every decision within an organization must be evaluated from a financial perspective. With the proper education and tools in place, CEO’s can drive their firms to its full potential.Tags: budgets, Cash Flow, Ceo, Finance, Strategy, Tax Positioning, Tools