While the mantra ‘revenue is vanity, profit is sanity and cash is reality’ still rings true for businesses, the profit column can be made to work harder, both for the business as a whole and you as a finance leader.
As part of AccountingWEB’s cash and finance management series Tom Herbert spoke with Nick Topazio, head of corporate reporting research at the association of international certified professional accountants (AICPA) to get a few pointers.
Get a good idea what’s driving your profitability
One of the most important things is to be crystal clear about how cash is being generated within your organisation. This starts with good internal reporting: knowing what drives your profitability and knowing the numbers that really matter to your business model.
You need a framework to show how cash is flowing through your organisation”
“It’s about understanding and having good systems and people within your organisation who understand the business model and how cash is flowing through. Then replicating this in a detailed framework and looking at how best to summarise that information and target it for decision makers based on what info they actually need to know,” said Topazio.
For a small and medium businesses that framework doesn’t need be complicated. Even large companies can break their models. “It’s really about getting to where cash is being tied up. Is it tied up in your stock holdings? What are your debtor days? To make sense of all this you need a framework as to how cash is flowing through your organisation,” he said.
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Don’t get bogged down
When you’re caught up in the day-to-day fog of finance, it’s not always easy to look up and see the wider picture. “It’s not getting completely bogged down in the profit and loss account, the accruals, prepayments and so on. They’re all necessary adjustments in terms of generating a P&L account – realised profit vs unrealised – but in terms of cash it’s very much down to first principles,” said Topazio.
“When I worked in industry our short-term cash forecasts and our cash forecasting over a period of time were driven more out of the treasury function than through the P&L account.”
Tell a gripping story with the numbers
Once you have the figures, use them to tell a gripping story to employees and the wider world. You need good interpretational skills to do this, along with relevant tools and the ability to communicate at the appropriate level. For the finance manager to be really effective, the numbers should translate into action and reality.
A good finance leader needs to adapt the story to their audience”
“You need to have a compelling narrative – to put your story in context of the business and the numbers should support the story rather than lead it – good or bad,” said Topazio.
A good finance leader also needs to adapt the story to their audience, and speak to them in language they understand. There are times where you need to say, ‘This is what you should be focussing on,’ regardless of whether you’re talking to the CEO, budget holders or a room full of sceptical analysts.
“You can present a spreadsheet with all sorts of numbers we accountants love,” said Topazio. “But if you talk to someone who’s not financially orientated who needs to make business decisions off the back of your figures, they can’t, or rather won’t, get the information they want.”
Accentuate the positive - sometimes
Your standing and the financial reputation of your business depend on the trust and credibility you build up over a period of time. That means not hiding bad news, but addressing it.
“If you build up a history of not talking about bad news then you’re going to lose personal credibility and the business in general will suffer,” said Topazio.
Including or excluding exceptionals like fines by changing the way profit is reported (from EBITDAE to EBITDA, for example) may be fine for one year, but repeating this trick may damage your organisation in the longer term.
Match the forecast to the actuals
Forecasting is also part of storytelling, feeding into your scenarios and turning the actual numbers into convincing and reliable narrative. If you’re an established company it’s all about delivering no surprises – give the board, the shareholder or the public what you told them they’re going to get.
It's important for finance to walk the shop floor”
Rolling techniques are enjoying a surge in popularity, as they allow you to continually adjust your predictions to minimise surprises. Even if you’re 40% off your yearly forecast, you can adjust expectations along the way.
Topazio, however, sounds a note of caution around rolling forecasts. “They can be useful, but I would say make sure that they’re actually looked at with a critical eye and not just taken because they’ve been churned out of the software. Give them a quick credibility check. Is this matching what we know as reality?
“It’s important for finance to walk the shop floor, and for the people producing reports to understand how the business is operating and what the business model is, not just delivering information from an ivory tower.”
How do you position your profits to help you and your business? Let us know by commenting below. To read more content on accountants in industry visit our business page.