What?Should?CEOs Know About?Financial Statements?

A company's success depends in large part on sound financial management. To make the best decisions for the future of the business, every CEO needs to have a good working knowledge of the company’s financial situation and clarity when looking forward, not just backward. While the chief executive may have a background in operations or marketing, the financially aware and inquisitive CEO is better equipped to direct the business, stay profitable, vibrant, and growing.  

We have all heard about the new tax laws that recently took effect. While we need to trust and depend on our accountants and financial advisors to provide good counsel on this subject, CEOs need to have a good working knowledge of it. Vistage recently published a guide titled “Top 8 things small and midsize businesses need to know about tax reform” to help our CEO members stay informed. 

 In order to make the best decisions for the company, the person at the top of the organization needs to receive and review regular reports of vital financial information. The CEO can effectively manage the company’s financial performance by paying attention to these important aspects of the business: 

Start with the accounting department. 

Every CEO needs a good working relationship with the accounting team. Begin with the basics so that you understand the process, from sales order to delivery, invoicing and collection. Find out where the bottlenecks are and guide the accounting managers to develop a streamlined process to keep account receivables and account payables running smoothly. Ask tough questions. Challenge processes and systems with your team. Encourage a culture that empowers people to ask each other “How can we do this better?”  

Review financial statements monthly. 

Just like everyone else, CEOs only have 24 hours in a day. However, this task should not be omitted. It doesn’t have to eat up a lot of time, but it does need to be on your calendar every month. Many of our members utilize software to improve transparency and clarity on financial information. These statements provide financial data that show the company’s financial health and overall profitability. Reports include the income statement, balance sheet, and cash flow statement. Your business will be more successful when you have a good understanding of the gross margins, overhead costs, assets, and liabilities. 

First, make sure that financial statements are being prepared on time and that they are accurate. An independent CPA should audit the end-of-year statements to verify and confirm that the reports are reliable. If you find that there are many adjustments to be made, that’s a signal to dig a little deeper and determine how to improve the process so the reports are accurate. Then look at each section carefully. Imagine your dream car and see the dashboard you focus on when you drive. These financial reports serve a similar function. What measures within your company need to be included for you to make the best decisions and biggest impact within your business? 

Income Statement 

This is also known as the Profit and Loss statement and it covers a specific period of time. It shows revenues and expenses that are related to sales and operations as well as non-operations such as interest expense. Compare current revenues to the previous year to determine if the revenues are increasing. This will help you decide if you need to rethink or revise your go-to-market strategy to keep revenues trending upwards. 

Balance Sheet 

This report gives details about the company’s assets, liabilities, and owner’s equity at a specific time. It shows what the company owns as well as what it owes. It enables you to monitor inventory levels and compare them to sales projections. The balance sheet provides a good picture of the company’s financial position which is important for investors as well as the company’s bankers when making a determination about credit limits.  

Cash Flow Statement 

This shows how cash flows in and out of the business. It’s necessary for you to be aware of this in order to keep daily operations going. Do you know where the cash flow is coming from? The report should show the percentage that comes from customers, profits, and investors. If the negative cash flow outweighs the cash coming in, the business is in trouble. 

Key Performance Indicators 

Every company has milestones that they want to meet and expectations for each business segment or product line. Check your financial statements monthly to see if you are meeting strategic and operational goals.  Our members utilize software created for CEOs.   

Bottom Line 

To stay in business, there must be adequate net income to support cash flow and it must be sustainable. Staying on top of the company’s financial health is imperative. You need to be assured that you have the financial resources to execute the current business plan and future vision. If not, something must change and the sooner you take control of that, the better off the company will be. Reviewing the financial statements and coaching your team each month will eliminate surprises and help you steer the company toward a bright and profitable future.