4 Topics for CEOs to Master Financial Fluency
Finance knowledge and decision-making shouldn’t solely fall on the shoulders of a CFO, Controller, or Financial Analyst. CEOs and business owners who want to be successful need to make confident decisions and know what good decisions look like. At times, this can feel daunting, especially to those new to business. Starting with just a few basics will increase your confidence and put you lightyears ahead of other owners.
All CEOs need a little bit of finance knowledge for 2 reasons:
You make better decisions that result in better margins!
It prevents fraud or even just “gray area” activity (it’s easier to steal than most people think and often happens by accident!)
There are 4 areas every CEO needs to understand about finance:
Understand CASH & how it works
How to read financial statements
Basic budgeting and forecasting
Setting & tracking KPI’s
Understand CASH & How it Works
Businesses exist to make money (i.e., cash). Cash is the lifeblood of all businesses. Customers pay cash for products or services, and that cash is then used to pay for more goods to make products, labor to provide services, and other expenses needed to run the business. There’s a cycle of cash flowing in and out of the business. Getting a handle on that is key to making it through some rough times that happen to all businesses.
Getting a handle on cash can feel daunting, but it doesn’t need to be.
The basics are:
Working Capital
Cash Reserves
Daily, weekly, or monthly cash flow
Reading Financial Statements
There are 3 financial statements: Profit & Loss (AKA P&L or Income Statement), Balance Sheet (kind of like your business’s net worth calculator), and cash flow statement.
Financial statements tell you what has already happened in the business. Knowing what story they’re telling lets owners know where to focus on improving revenue, gross margin, opex, and net income (i.e., make more profit).
Basic Budgeting & Forecasting
Budgeting and forecasting look and feel similar, each serving its own purpose.
Budgeting aims to tell a team the maximum amount of dollars they can spend to achieve a specific goal (or KPI). Typically, good budgets are in 12 or 18 rolling cycles and are locked - meaning there’s a not to exceed amount unless a certain level of approval is met.
The purpose of forecasts is to show an owner, executive team, or external group what could happen . These are loose, almost always wrong, and typically not capped. There are many uses for forecasts and quite a bit of overlap between budgeting and forecasting depending on how a certain business operates.
Setting & Tracking KPIs (Key Performance indicators)
KPIs do not need to be complicated. KPIs that are hard to track or too complex can keep you from your business goals.
Simple KPIs will keep you and your team accountable. You will know what success looks like; You will achieve your goals.
As the CEO, your job is to set the KPIs or concrete with your team and then delegate the management to the team or people with the most impact on those KPIs. The team then reports them to you, and you clearly understand what’s working and not working in your business.
3 top KPIs you can start with are:
Gross Revenue
Gross Margin
Net Income
After you’re comfortable tracking these regularly, you can get more sophisticated and add in leading indicator KPIs that will start to predict where Gross Revenue might land. For example, the number of qualified leads per month. There are endless KPIs, many specific to different business models and industries. They must align with your business model and goals, and they must be trackable.
When you’re a CEO, it can be challenging to constantly monitor your finances, and often, it feels hard to make the best strategic decisions. Having the basic finance knowledge down helps you know what good looks like and feel more confident doing what the CEO needs to do. If any of the above concepts feel too complicated or you’ve never heard them before, I urge you to learn them - your business will thank you.
