Making Your Board a Strategic Asset

Jean Pousson reflects on over 30 years of lecturing on finance and finance-related subjects, in over 30 countries to an estimated 17,000 course delegates.

Over the festive period, I did a rough estimate of how many delegates I have had the pleasure of training on finance and finance-related matters, and this is about some of my reflections, which I hope you find useful and of practical relevance. Below would be typical comments and questions raised by delegates.

“I hate numbers. Always been rubbish at maths.” This is a popular comment. Finance is not just about numbers, (that’s the easy part), it is about the story behind the numbers. It is about understanding how the engine works and how all the parts fit together. This is where education needs to take place!

It’s ok for you to say, “ask the questions, but I’m terrified of the answers”. I always advise Directors to ask and ask again. As a non-finance specialist, you have every right not to understand 100%. The above response from a delegate brought great hilarity in the room. My point is, do not let the CFO/FD off the hook if you do not understand the answer. Do not get brushed off with answers like, “it is for tax reasons”, or, “it is to strengthen the Balance Sheet”. Persist by saying things like, “Really? Do tell more.” You’ll learn something new!

The Psychology of numbers. Running a course once in the USA, we were looking at WalMart as a case, and one comment from an Investment Analyst was that the margins had deteriorated by 10 basis points. “Is that a big deal?”, someone asked. ”10 basis points? That’s nothing”. Well, Walmart’s annual revenues, (sales), are around $559bn. Work out the numbers for yourself. My point is, don’t immerse yourself in performance ratios and forget the base numbers. A small percentage change for a business of that size, matters!

Terminology. Regrettably in finance, some words or definitions can mean different things to different people, ie, equity, liquidity, value, Return on Investment, contribution, etc, so it is imperative to seek clarification when these are being mentioned. I always do and so should you!

“But the accounts were audited!” External Auditors give you an opinion, no more. They are not Forensic Accountants, they cannot check everything, they have to rely on management and the internal controls. As a senior Partner from one of the UK’s Four Accounting Firms said, “we give A True and Fair view and not THE True and Fair view”. Subtle but important!

“Help me read the Balance Sheet.” This is another popular one. Financial performance is captured by three principal statements, ie The Income Statement, (Profit and Loss), The Statement of Cash Flow, and the Balance Sheet, (latterly called the Statement of Financial Position). It is an important document but it is only one of three! It also looks at a business on one day. Give thought as well as to why they have chosen that date particularly if it is a seasonal business.

“Give me three measurements to focus on.” Financial performance, like assessing one’s health, is captured by very many measurements. Asking and focussing on two or three misses the point, and narrows the analysis. This approach would certainly lead to an incomplete assessment of the Company’s financial performance!

EBITDA, EBITDA, EBITDA. There is sometimes an obsession with this. A fetish almost. Directors mention this measurement as if it were the only one. EBITDA, (Earnings before Interest and Tax, add back Depreciation and Amortisation), is a rough proxy for cash flow. It is an operational measurement, no more. Don’t let this obscure your thinking to the detriment of other equally important metrics!

“Forecasting has become impossible in this pandemic economy.” Forecasting, by definition, is couched in uncertainty. This is a property of business life and will be always, it’s just that sometimes the uncertainty factor is elevated. As I always respond, “it is better to be vaguely right than precisely wrong”. Enough said!

“The operation was successful but the patient died”, is an old joke told to me by some Surgeons. But the point is well made. What are you measuring? Are these aligned to your strategic ambitions? Are the Key performance Indicators, (KPIs), the right ones? As Peter Drucker would say, “what gets measured, improves”.

Feedback. Typically at the end of a course, delegates are asked to complete an evaluation form of sorts and comments are invited. The following will live with me forever. “Dear Jean, I came on this 3-day finance course worried and terrified. I leave equally worried and terrified but about more important issues.”

I took it as a compliment, (I think!)

 What is complicated is rarely useful, and what is useful should not be complicated!