At Insight Training we spend a lot of our time helping finance professionals to get the numbers right.

Why? 

So that the people who use those numbers can take useful and appropriate action – whether that be to inform commercial decision making or to fulfil regulatory obligations (such as paying tax or publishing annual accounts).

Too often, though, the finance professionals that produce the figures and the decision makers that use the financial information seem to be speaking a different language.  There’s huge potential for businesses, large and small, through helping finance and non-finance managers understand each other and work towards being true business partners.

Here is a selection of some of the key questions raised on recent financial and commercial awareness sessions.

Why can’t I spend profit?

Because profit and cash are not the same thing!  Profit (or loss) is a long-term measure of performance.  A focus on the long-term means that a typical P&L is jampacked with all sorts of non-cash accounting adjustments.  These might be timing differences – when revenue is recognised (when earned) and when costs are included (when incurred) or valuation (let’s make sure it’s ‘fair’). The accounting concepts of accruals and prudence, that are as natural as breathing to an accountant, are very unobvious to the operational manager.  Business growth is often driven by the sales force, the production engineer, the entrepreneur, who understand their product and its potential profitability well.  So surely selling more of what’s profitable, growing the business, will help? Yes and no! And to understand why we need to think about working capital.

What is working capital and why is it important?

Growth is typically the key objective for most businesses, but it can be disastrous for cash flow.  Working capital – money tied up in stock and debtors or owed to creditors – must be managed if a business is to survive.  Increasingly, big companies are exerting their power by imposing long payment periods on their suppliers and asking them to keep stock to supply them quickly.  At the same time big suppliers may demand quick payment.  It’s a sad fact of life that many businesses, especially SME’s, have no choice but to accept the terms imposed upon them.  The Federation of Small Business conducted research estimating that 50,000 small businesses go bust each year due to cash flow problems.

If those working on the operational front-line, outside of the finance department, understood the cash flow pressures resulting from poor working capital management – different decisions might be made. To understand these pressures you need to look beyond a business’ profit and loss account, which might provide no clue that such pressures exist.

But why do I need to know about finance?  ‘I’m not a numbers person’

It’s not the numbers but the story behind them that’s important, something which people working outside of the finance function might have a far better understanding of.  The operational team must be made aware which key financial drivers impact on the business strategy and successful performance and it must then be up to them to manage them.  These should be translated into Key Performance Indicators.

Performance measures only drive effective performance if an operational manager understands how their actions impact the financials and fully appreciates the impact of their decisions.

  • Should discounts be offered to secure a sale?
  • What costs need to be covered when making a pricing decision?
  • How to balance the short and long term when making an investment?

And the finance department can only help commercial decision making if they provide the right information, at the right time, presented in a way that operational managers can understand and use.

And the front-line should be encouraged to get involved in producing the numbers as well as using them – so many get involved only begrudgingly.

What’s the best way to set a budget?

One of the most common questions we get asked.

Like so much of finance, budgeting is more art rather than science!  Top-down, bottom-up, zero-based, incremental … so many options.  There is no ‘best way’ but certainly pro’s and con’s of the various methods – many of them relate to the time and effort required to put the numbers together.

What is certain is that non-finance managers often loathe budget setting and managing the related constraints and hence rarely use the budget as a management tool.  This is a massive opportunity lost as, used well, the budget can be a hugely useful management tool that can be used to inform, motivate and evaluate decisions.

But as with all things financial – all the time the finance function and the rest of the business speak a different language, opportunities continue to be missed.

Nicky Clough

Insight Training