Does your C-level understand your company’s numbers?

In my experience, Brazilian executives handle finance better than their North American or European counterparts – particularly in treasury roles and dealing with concepts such as present value, discounted cash flow, compound interest, etc. With a history of high inflation and very high interest rates, Brazilians have acquired a very clear notion of the time value of money.

But with regard to financial management in general, and accounting in particular, the reality is different.

For many “C Level” executives, financial statements (DF) are a mystery, and they only follow them superficially. The CEO and CFO give importance, but most other members of the “C Suite” cannot make the connection between these numbers and their department’s activities and priorities – and are embarrassed to say this and ask the CFO for further clarification. .

In day-to-day controlling and financial management, numbers need to be easy to understand and communicate a clear story. Members of the “C Suite” must make an effort to understand the story, but it is up to the CFO to develop the narrative hidden in the numbers, using graphs, diagrams and illustrations that tell a story. For anyone who wants to delve deeper into the subject, I recommend Simple Numbers, Straight Talk, by Greg Crabtree, Entreprenumbers, by Spencer Sheinin, and The Great Game of Business, by Jack Stack.

One difficulty that many financial executives have in crafting such a narrative is that they lack a good idea of ​​the complexity of their peers’ roles, and as a result they do not know how to assess what information they need to make decisions. Furthermore, due to the insecurity of non-financial colleagues, they also do not say what numbers they need.

There are many companies where the board only looks at the Profit & Loss (L&P) accounts, comparing them only with the budget, and where the balance sheet is not even presented.

One of the risks of doing this is that looking only at the L&P it is possible to see a scenario, for example, where sales grow, margins are maintained or even increase, profit increases, but growth requires so much working capital that the generation cash flow is negative, so that the faster the company grows, the more it consumes cash, and the more indebted it becomes. And all this with the board understanding that everything is fine!

In my experience, for most CFOs and financial managers, the main concern is generating financial statements on time for corporate purposes and possible consolidations, as well as meeting the requirements of different tax bodies. This leads the finance team to focus on the past.

They leave the production of management information and projections that are necessary for decision making in the background. To give some examples of management information, I would mention profitability by business unit (BU), profitability by product, profitability by geographic unit, profitability by customer or category of customers, Return on Investment (ROI) of the company as a whole, and ROI of each BU and each new project as well.

Furthermore, the criteria for accounting classification (for example, the accrual basis) may be very different from the criteria adopted in preparing the management information system.

Another problem I encounter is that many boards only look at the DFs from the last period. This is like driving a car looking in the rear view mirror, because FDs from just one period are a portrait of the past. The “C Level” needs to watch a movie – looking at the trends indicated by the analysis of a series of months, both of information contained in the DFs and that in the management information system. These trends then serve as a basis for future projections.

And future projections should not be prepared just for budgeting purposes, assuming that the company will continue to work in the same way as it does today. Projections must also be prepared to simulate different scenarios if the company changes direction, adopting a new business model, entering new products or new markets, or ceasing certain activities.

Another mistake that I see with some frequency is that many companies consider EBITDA (EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization) as an indicator of cash generation.

In doing this, they forget that in general revenues, costs and expenses are classified on an accrual basis, and when interest and depreciation expenses are added back to net profit to obtain an approximation of cash generation, the figures revenue, costs and expenses continue to be recorded on an accrual basis and not on a cash basis, which can generate a very large distortion. Furthermore, EBITDA also does not take into account cash outflows represented by investments, capitalized expenses, the impact of working capital, and debt service.

Good financial management requires not only good notions of treasury and competence in preparing financial statements for corporate and tax purposes.

It also requires the ability to make these numbers relevant to managers, to create a management information system that is fundamental for the Board to run the company, and to focus on both the future and the past, creating projections and simulations that help the CEO to outline the way forward.

Nicholas Reade is the founder of RRBA, a management company for leadership teams, and was CEO of Brookfield Incorporações.

Nicholas Reade