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August Newsletter; Jean Pousson provides some useful tips on financial awareness.

Do You Understand Your Finance Director?

Jean Pousson provides some hints and tips to Executives and Senior Managers who would like to improve their understanding of finance.

I have been running finance training programmes for well over 20 years both within the UK and internationally to all levels of management and directors, and the lack of understanding that this discipline presents is always a major challenge. This can manifest itself in not fully grasping terms and jargon, which is easily fixable, to a complete lack of understanding of basic concepts. I have seen company directors and pension fund trustees who have admitted that they place total reliance (i.e. blind faith) in finance experts.

Ignorance is no excuse and in today's increasingly litigious society this argument does not wash well in a Court of Law. Indeed, I have seen many examples of director disqualifications where the sole defence against a proposed disqualification was that they trusted the finance director completely.

Often some very basic concepts are not understood at all. For example, are you aware that even though your company is increasing sales and is profitable, the company could still be declared insolvent?

Obviously there has to be personal responsibility from managers and directors to educate themselves properly as part of their continued professional development. We provide dedicated and bespoke training programmes on the subject. One-to-one technical coaching is also possible, and often preferred by directors.

In the interim, find below a basic checklist that you mind find helpful.

  • How quickly after month-end are your management accounts ready? How quickly after year-end are your statutory accounts ready? Lengthy delays could indicate that all is not well.
  • Who oversees and appraises the finance director? If finance is not a strong capability for you, how would you know that he/she is doing a good job? Large organisations will have an internal audit committee and the UK Corporate Governance Code issues guidelines as to the workings of such a committee (see http://www.frc.org.uk/). Smaller companies do not have this privilege and it is, therefore, imperative that on the Board or the management team there is at least one other person with good finance qualifications to “kick the tyres”.
  • Use your auditors well. If something concerns you there is nothing stopping you from directing the external auditors to show more vigilance in certain areas.
  • Watch out for over-complicated organisational and financial structures. These are often facades to distract attention away from what is really going on.
  • Can you explain the levels of borrowings in your business? A business that ticks over, where nothing much has changed (i.e. there have been no acquisitions, restructures, disposals etc.) only needs to borrow money for three reasons: 1, there is a loss; 2, there is a working capital requirement; 3, capital expenditure. Loose rationales (e.g. to fund growth, to finance the operations of the business etc.) need more clarity. And remember it is cash that repays loans not profits!
  • Show me the money. Jesse James the famous bank robber was once asked why did he rob banks. His answer? That’s where the cash is! A company’s bank statements do not lie. Track the cash. Can you reconcile the cash flow with the accounting results? And remember…you will only run out of cash once!
  • The following are idiot proof questions, that you will never be embarrassed for asking, to put to the Finance Director should you be uncertain about some proposed business decision:

          -  Is this legal? i.e. allowed for in the Companies Act?

          -  Is this in-line with current accounting standards?

          -  What will be the impact on profitability?

          -  What will be the impact on the balance sheet?

          -  What will be the impact on cash flow?

          -  and finally; any tax implications?

  • Should there be a proposal to raise debt, here are some more useful questions:

          -  Can we afford this?

          -  What is the cash capacity to service and repay?

          -  Have we done cash flow projections on a distressed basis, are we still ok?

          -  Will our credit rating still be ok, could we borrow more if we had to?

  • To finish off have a look at the following statements and answer them with a simple true or false.

          -  Deferred income is shown in the balance sheet as an asset.

          -  Total borrowings cannot legally exceed shareholders’ funds.

          -  The cash figure in the balance sheet is a good indicator of overall liquidity.

          -  Goodwill in the balance sheet will boost profits.

          -  The tax figure in the profit and loss is always the tax paid to the revenue authorities

          -  Working capital requirements are best measured by the cash position in the balance sheet

How did you find these questions? The answers are all false by the way! Good luck out there!


If you would like further information about the BEL Financial Awareness Masterclasses or you would like to discuss an in-house or one-to-one session with Jean Pousson, please contact Gary Cowdrill on 0870 720 3904 or at gary.cowdrill@board-evaluation.co.uk