CEO – Fiscal Competence

CEO – Fiscal Competence

September 6th, 2014 // 3:30 pm @

financial-aid-101-300x216No really good CEO can operate without understanding “The Numbers”. Much of business is about money and other key numbers, having a strong grasp of what the numbers mean is business critical.

That is not to say one needs to be an accountant, in many ways that is a very different skill. A CEO must be able to understand the business model in financial terms, and must understand what a profit & loss statement means, and the same for a balance sheet.

If you watch a good CEO they can look at a financial statement, automatically look at the ratios within it, and ask pertinent questions as to how the business is performing.

There are several very distinctly different parts to competent fiscal control:

  1. Fiscal Modelling, this is separate from accounting, it is looking forward and modelling financially what happens if we make certain decisions. This allows a financial understanding of how different decisions are likely to work out. In businesses I have run I have normally kept this separate from accounting as put together they tend to confuse each other. One is modelling the future, the other recording the past.
  2. Accounting, the accurate recording of the business performance, which is critical in understanding what has actually happened within a company. Good companies work hard to understand what has happened; compare it to what they were expecting, and most importantly understanding why.
  3. Budgeting is one of the most powerful tools a CEO has to direct a company and where resources are focused. The budgetary process needs not to be a, what we spent last year plus inflation, that sets no direction except drift. The process needs to start with the vision, work through the business model, and then allocated resources appropriately. And from that be monitored regularly.
  4. Accountability through the organization. The more managers’ feel responsible for their budgets and targets the more likely they are to be achieved. The review of budgets in every company I have run has been a rigorous process, which allowed us all to understand where we were doing well and what needed, changed.

I have deliberately entitled these thoughts Fiscal Competence rather than Fiscal Control, as the level of fiscal control is a managerial tool, which can have significant impact on business results.

It is normal to think that tight fiscal control is good, and in many cases that is correct, but not always. I have run very high growth companies who’s market capitalization was driven by the speed of that growth, in such cases relaxing the fiscal control, accepting some financial inefficiency was a worthwhile way to drive very rapid growth.

It is for a CEO to understand what all the numbers mean and to use them as management tools, that is the key to fiscal competence.

 

 

 

 

 

 

 


Category : Blog &CEO

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