DRAWING MEANING FROM YOUR FINANCIAL$ by Bukhosibenkosi H Moyo
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very CEO has a vision to drive his / her company forward, and every CEO doesn’t want the ship to hit an iceberg under his / her watch. Never. As a result, the CEO spends valuable time in briefings, in meetings and in workshops. He allows for an amazingly huge budget for annual strategic planning sessions. Sadly, notwithstanding the effort, company performance sometimes goes down embarrassingly. And the buck stops with the CEO. The CEO then has the unenviable task of facing seemingly ruthless shareholders to explain why performance dipped. In many such scenarios, many CEOs have paid with their contracts. Sad. But it need not be. There lies, within the very reach of the CEO, and within his imputed rights, a powerful communication tool that can shed more light into the operations of the business than any strategic planning session can. The financial statements. The financial statements are composed of the statements of financial activity, financial position, cash flows, changes in owners’ equity and the notes thereof. When they have been properly prepared (that is, prepared in accordance with an appropriate financial reporting framework such as
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IFRS, IAS, IPSAS), they provide company leadership at all levels including the apex, with valuable information that can lead to change of long term strategy. Whilst other non financial information is critical, such as market information and technological changes, the bigger and clearer picture is told by the financials. Without reducing the boss to a bogged down number cruncher, the financials provide a good snap shot of past, present and future performance, and affords valuable opportunity to plan for this future. Having analysed the financials, strategy can be amended to keep the ship afloat. Many CEOs are Chartered Accountants and would therefore have no problem in understanding financials. But for the sake of those from outside the numbers professions, here is what you should ask for and use. Ratio Analysis Gone are the days when the CEO was only interested in the ‘top line’ – the revenue, and the ‘bottom line’ – the profits. There is so much more. As an example, if the company were to invoice USD5 billion to a huge customer, who is set to pay off ‘later’, the financials will have a handsome top line and an even cuter bottom line. But there is a risk that the USD5 billion may be uncollectible.
A CEO who looks only at the top and bottom lines will have a wrong picture altogether. However, further analysis can show the correct picture. To the CEO, the FD should present a pre defined set of ratios, that summarise the financials. Ratios are classified into four distinct groups, namely liquidity ratios, profitability ratios, efficiency ratios and gearing ratios. These are so designed to analyse the financial statements in full and CEOs should be trained in the analysis. Efficiency ratios, for example, include some asset utilization ratios that show how much revenue you are generating from your investment in noncurrent assets. These assets are by their very nature meant to generate income for you. But have they? It could be that the heavy investment in plant has not yielded the expected proportionate increase in revenue. The ratios will say and you may decide on what corrective action to take. Liquidity ratios are designed to gauge your immediate ability to pay off short term obligations. You will agree that it is embarrassing to realize that by the 10th of April you are just unable to remit PAYE for March. So much from a learned and experienced CEO! Be on the lookout for these tell-tale signs of trouble. Check your
