Empower Your Team With Knowledge

Empowering your people in the discipline of financial performance management significantly enhances their ability to impact the quality of their decisions and actions.

It is estimated that more than half of mid to senior managers do not have a clear understanding of how the income statement, balance sheet and cash flow statement integrate. Managers make ongoing decisions that impact the income statement favorably but could cause a significant adverse impact on the balance sheet and cash flow. Alternatively cash favorable decisions can have the reverse effect on the income statement.

Consider the case where a senior management team implemented a scorecard measure of 98% on time delivery in full. The focus on this metric significantly improved customer satisfaction, however the improvement was most detrimental to the balance sheet. In a typical traffic light system, working capital requirement significantly increased with cash flow quality moving from dark green to bright red. We can share numerous famous and possibly some infamous real life examples of how financial statement understanding can highlight operational dysfunctions.

So why do the known conditions not automatically become common knowledge within the organization?
It's called the "organizational blind spot": knowledge known by others but not known by the people in the decision execution process.

So how can improved financial statement knowledge help reduce my organizations blind spot? The answer is simple. The way financial statements are designed do not facilitate the ability to tell the story behind the numbers. This communication constraint reduces peoples dependence on the financial statements as the core management tool. It simply becomes the scorecard that accountants create. Who cares what finance puts out, right? To prove the point, road test this question... ask all managers who receive Financial Statements what they do with them. Then ask them to show you. Look at the ratios, if any. Look for remarks, calculations, see anything?

You may get many answers but the one that you most probably wont get is "I use my Financial Statements as a core management and decision tool." To take this one step further let me tell you a story of a NASCAR race team. The guilty party was the R&D department where it was perceived that costs were out of control.

Accounting response was to provide R&D with a more informed picture. They created a budget based on people cost, machinery and equipment cost, travel costs, consultancy and all the other standard cost categories. The reports were produced with actual against budget with the hope that the variations would change behavior. What do you think the result was? Spending stayed the same actually went up slightly.

We were doing our financial performance training and one of the required attendees was the VP of R&D, highly against his will; "How can a better understanding of Financial Statements make my cars go faster?"

- Just you wait Henry Higgins!

Being a little inquisitive to the manager's response I inquired as to what his financial accountability was and how this accountability integrated into the management system as a whole. He explained that he has clear accountability but has no way to manage it. The reports do not help me reduce my costs. I responded with the simple question what exactly do you do in the business; "I make cars go faster was his response" To do this I focus on heat reduction, aerodynamics, perform tests with our cars under different conditions, we experiment with different engine components. My answer is what if I could give you a set of financials based on those things that you do would this help. I explained that it was reasonably easy to show the cost pools based on

• Heat reduction cost 
• Aerodynamic costs 
• Testing 
• Engine modifications 
• Chassis modifications 

His response was that would be enormous as; "I know the impact heat improvement has on the track and I could possibly be spending way too much on this initiative." This became a senior management recommendation from our training.

It is amazing how this led to some major changes as a further example testing was done on a free track some 2000 miles away. This track was very popular as the usage of the track was free. The reality was to get there with 4 cars pit crews etc was not. Paying for a local track would reduce testing costs by some 50%. What we have learnt is that the key is in how financial statements are communicated. This is not a skill that many organizations possess nor do they even think is necessary.

This big barrier here is that Financial Statements are usually reported in some static format. This is where we believe that if you can bring your numbers alive the discussion becomes very engaged with some real different ways of thinking.

Our recommendation

Create a platform to communicate the numbers in a simplistic but easily understandable format.
Facilitate learning by using the same platform with each meeting
Engage this discussion by showing the impact of different decisions through comprehensive what if's that can be shown on a real time basis.

• Connect people to the different value add metrics 
• Connect the value add metrics to your core competencies that drive the success of that metric. 

On this example page from Global Financial Bridge our companies can see the integration from Income Statement to Balance Sheet and Vice Versa. Simple.

We discovered that this can't be created by spreadsheets, so we know companies that realy on Excel, are shooting in the dark, basing their managements ideas on intuition and not the rigor required by hard evidence.

So our question to you is; are you basing your company decisons on hard evidence or a gut feel? If you want to see the results of your decisions in a simple, easy to understand format, contact us. You may be surprised by what you learn!