Become A Financially Literate Leader

Financial Literacy

Leadership has been described as “the art of motivating a group of individuals to achieve a common goal.”[1] If you are a business leader, then that common goal is to continually strengthen your business.

Logic dictates that leaders need to use all the tools at their disposal to get the job done. However, in my experience, one tool that most business leaders have sitting right on their desk, but seldom if ever use, is the company’s annual financial statements. This information is a treasure trove that a savvy financial leader can use to pinpoint the challenges and opportunities facing the company and that they can leverage to effectively inform and lead their team.

Sadly, I have observed that too many business owners and senior executives just don’t get it. They pay accountants to complete their financial statements and ensure the company is tax compliant. Maybe they look at those reports, but many entrepreneurs do not understand how their company’s financial statements have been prepared and what the information is telling them.  Are they getting full value for the fees they are paying?

“It’s all Greek to me” just doesn’t cut it.

Cash is the blood that flows through the veins of the company. Simply recognizing the reality that increased revenue consumes capital, and the impact this has on the balance sheet and the company’s ability to achieve its goals can make a huge difference in performance. The often-ignored Cash Flow Statement explains exactly how the company sources and uses cash. Understanding this information and using it effectively will help a leader motivate the team to achieve identified goals that will, most likely, improve both cash flow and the bottom line.

Five basics to keep in mind:

  • Cash is king
  • The balance sheet has to balance
  • Increased revenue consumes capital
  • Decreasing an asset or increasing a liability is a source of cash
  • Increasing an asset or decreasing a liability is a use of cash

Becoming a financial leader is a worthwhile goal. It’s really not that difficult to understand and it is worth the effort. Once mastered, you have an amazing tool at your disposal which will strengthen your business by helping you and your team focus on what can really make a difference. It will help you win in an increasingly competitive marketplace.

 

[1] Susan Ward, What is Leadership. www.thebalancesmb.com

 

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September 1, 2021

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