What type of leader do you aspire to be? A visionary leader like Mark Zuckerberg? A democratic leader like Warren Buffett? A pacesetter like Steve Jobs?
When it comes to figuring out your leadership style, of course it’s great to look to CEOs of other companies for guidance—but you can only learn so much from TED talks and self-help books about how other people do things.
As every strong leader knows, at a certain point, you realize that the company-specific knowledge held by your own team is the strongest tool in your leadership arsenal.
And of all the people on your bench to look to, your financial manager may just be the MVP.
That’s why, whether you’re working with a CFO, a single accountant, an entire financial department or an outside firm, as a CEO, you need to set aside time at the end of every month to hear a full report on your company’s financial health.
Why Monthly Check-Ins?
CEOs are like pilots for commercial airliners: it’s your job to steer the business in the right direction, making sure that everyone on board arrives at the destination—i.e., success—safely.
And if it’s your job to fly the plane, then meeting with your accountant is the equivalent of checking the weather forecast to stay apprised of every condition that could affect your flight.
Without a proper understanding of your company’s financial health, you’re flying blind. You simply can’t make the kinds of leadership decisions that will result in sustainable sales, profit and total shareholder return (TSR) growth.
By holding this standing meeting each month, you can accomplish several things, including:
- Staying on top of tracking performance against yearly goals.
- Identifying successes and failures sooner.
- Implementing course-correcting strategies faster when goals aren’t being met.
- Establishing a strong working relationship with your accountant so you can feel comfortable trusting their opinions and relying on their advice.
So once you make the decision to work this closely with your financial advisor, you’ll want to set a standard agenda for those meetings.
This agenda may evolve over time, but a good jumping off point includes three conversations that cover strong indicators of your company’s status: A financial progress report, net profit margin and key performance indicators.
1. Financial Progress Report
What it means: Generating a financial progress report is like asking “how’s the business doing financially?”
This is the part of the meeting where you’ll go over all the statements that indicate the financial health of your business. A few reports to look for in this part of the meeting include:
- Balance sheets. These include all the assets your company currently holds—both cash and assets—as well as all outstanding costs or payments your company owes.
- Income/P&L statements. These indicate exactly how much money your company made over a specific duration of time. Because these are typically issued every quarter, you might not see much change from month to month. Still, it’s smart to keep an eye on this.
- Cash flow statements. These show all the cash exchanged with other businesses or organizations each month. These statements are the best way to see whether or not your company stayed positive or went into the negative over the month.
Again, your meeting will depend on your business and your priorities, so make sure you’re open to hearing what your financial partner has to say.
The strategy here is for you to work together to identify the indicators that best reflect your company’s goals, and then include any reports that can be useful for tracking progress and/or performance in those areas.
Now that he has a new responsibility to shareholders, David has decided to establish a more collaborative relationship with his CFO, Sara. For their first official monthly finance meeting, David asks Sara to start by presenting an overview of the current state of the company.
To that end, she included the 2017 profit and loss report for Soft-Wear, which showed that after taking out $481,000 in expenses for the year, including $105,000 for rent, the company had a net profit of $314,000 for 2017.
David is a little alarmed at the amount his company is spending on rent, so he makes the decision to look into this and see if that number can be lowered.
Why it matters: To effectively keep an eye on your accounts, it’s crucial that you identify ways to monitor the health of your business that are specific to your business.
You simply cannot lead a company into financial success if you are oblivious to the details, and investing the time each month to hear and understand those details is a great way to ensure you’re staying involved and closely monitoring your company’s financial health.
On top of all that, keeping yourself informed on all matters financial will make reporting to shareholders, board members or potential investors that much easier.
2. Net Profit Margin
What it means: Your net profit margin is a ratio that clearly shows how good your company is at turning revenue into profit. The formula for determining net profit margin is simple:
NET PROFIT / NET SALES = NET PROFIT MARGIN
To calculate your net profit, you first need to subtract your total expenses from your net sales (also referred to as total revenue). From there, you just divide that number by your net sales. This equation tells you exactly what percentage of every dollar your company makes is actual profit.
With $1,000,000 in total revenue, less $205,000 for the cost of goods sold and $481,000 for all other operational expenses, Soft-Wear’s net profit margin formula looks like this:
$314,000 / $1,000,000 = 0.314 = 31.40%
Sara informs David that the average net profit margin for virtual reality programming and manufacturing companies is 28 percent, so now David gets to be proud of his company’s performance in this area as well.
Why it matters: Net profit gets its own slice of your monthly meeting—separate from the financial progress report—because it’s such a massive indicator of whether or not your business is succeeding.
It’s also kept separate because net profit does not indicate the amount of cash your company earned over the month.
And finally, net profit margin is one of the best ways to compare your company to others in your market space, and analysis of net profit over time can provide valuable insight for diagnosing problems and looking ahead.
3. Key Performance Indicators
What it means: Key performance indicators, more commonly referred to as KPIs, can be any set of predetermined metrics that track actual performance against ideal benchmarks.
Without tracking them, your business will likely fail. When it comes to measuring financial success, it’s wise to work with your accountant or CFO—who knows your business model and can help you set realistic expectations—to identify:
- What success looks like, and
- How best to tell when your company achieves success.
Once you agree on however many financial KPIs you want to track, incorporate updates on those indicators each month to closely monitor your company’s financial health.
- How well individual SKUs sell
- How efficient their warehousing setup is
To do that, they’ve made the choice to track inventory turnover. The formula they choose to determine inventory turnover rate is:
COST OF GOODS SOLD / AVERAGE INVENTORY = INVENTORY TURNOVER
After Q1, Soft-Wear’s Cost of Goods Sold for their most expensive SKU is $55,000 and their average inventory is $10,000.
$55,000 / $10,000 = 5.5
This tells us that inventory for the product in question turned over 5.5 times in Q1.
Why it matters: The main benefit of tracking KPIs is that they provide deep, valuable insight into your company’s performance.
Without that visibility, you’re going to be slower to identify problems, implement corrections, make business decisions and meet customer needs. To put it simply, keeping track of financial KPIs can make you more informed, agile and successful.
Conversations in Review
So there you have it. With the help of his trusted CFO, David now has real knowledge to help him make decisions and be a stronger leader. Thanks to his conversations with Sara, he gets to enjoy the following benefits:
- His company will lower operational costs by finding a more cost-effective office space to rent or purchase.
- He has a better understanding of his company’s competitive edge in the market and will be able to track their profit margins more effectively.
- He has a baseline measurement for inventory turnover of their most expensive product, and can now track performance in relation to that number.
Yes, David is a made-up CEO with a made-up company, but the lessons are entirely real. Collaborating and communicating with your financial partner will only result in making you a better, more informed leader, and that’s fundamental regardless of which leadership style you choose.
If you want to learn more about accounting for your business or software solutions that can simplify your financial management and accounts, check out our FrontRunners.