The Financial Accountabilities of Leadership

By Neil Ducoff

Financial Statements and Crystal Balls

Have you taken control of your business’s financials? Financial control is a cornerstone for implementing a team-based pay program. Any change in business operations will require good leadership skills, and it has been said that one of the marks of a good leader is the ability to predict the future. Updated, accurate and frequent financial statements enable you to do this.

Cash-flow plans, balance sheets and income statements are three financial tools that allow you to predict and control your financial future, hold everyone accountable for your company’s growth and honor promises made to the team.

Cash-Flow Plans

Let’s look at the cash flow plan first. What do you get from a cash flow plan? Cash-flow planning tells us the amount of cash our business will or did generate during a specific period. Cash is the fuel that drives a business.

The more cash on hand, the greater the business’s ability to help get rid of (or at least pay down) debt, provide revenue for company investment and grant incentives to the team.

Cash-flow planning also tells us:

• When expenses will come due, and how much has to be paid out.

Taking a sharp knife to all the company’s expenses in order to decrease its cash outlay will obviously increase your cash position. Nevertheless, involving the team in the process can often lead to surprising and dramatic results.

• Where the income will come from to pay these expenses.

Making realistic goals, or predictions, gives your team a road map to success, as well as inspiration for team performance. Periodically reviewing these goals will help keep the fires burning, and ensure they are neither too high (which can cause a sense of discouragement), nor too low (thus failing to provide

inspiration).

• Whether everyone is fiscally responsible.

Accountability is an important ingredient in cash-flow planning. Without the transparency that derives from frequent—I suggest weekly— cash-flow updates, even the best-made plans can go awry. This accountability also instills trust in the company’s leadership team.

• Where the leaks are. When extra effort is needed to stop the bleeding of certain expenses, or efforts need to be redirected at increased sales, cash-flow plans allow us to put our manpower to use where it’s most critically needed. This allows a company to turn its financial ship on a dime.

If you really want to supercharge your company and its growth, there is probably no better way than through excellent cash-flow planning. Cash-flow planning is forward thinking. Think of it as a highly detailed budget. You can create a good cash-flow plan based on a calendar year or fiscal year, and then break it down by individual months.

Here are some of the specifics:

• Sales revenues.

These are created through sales over a certain period, including sales of services, retail goods, and gift cards or packages.

• Cost of sales. This expense usually includes costs directly incurred by the company in providing goods and services: payroll for service personnel and their associated payroll taxes, cost of retail items sold, and cost of supplies needed to provide said services. Each of these expenses is listed separately; the final

cost of sales shows the total.

• Gross profit (or gross margin).

Subtract cost of sales from sales revenues to find gross profit.

• General and administrative costs.

Here is where all other business expenses are listed, from advertising to utilities. Each is listed separately, and all are normally paid on a monthly basis. Again, a separate line shows their total.

• Gross net profit. This is the amount of cash available after all expenses are paid, but before taxes are paid.

We now have a completed cash-flow plan, which should show the most accurate and up-to-date status of your business. However, while it’s an important tool, it’s not the only one.

Income Statements (Profit-and-Loss)

What’s on the income statement? Income statements, otherwise known as profit-and loss statements, are a summary of a company’s profit or loss during a given period of time, whether one month, three months, or a year. The income statement records all revenues for a business during this period, including those that come from sources other than its core business, as well as all operating expenses.

What are income statements used for? Income statements help determine the performance of your business. Small business owners use them to find out what areas of their business are over or under budget, according to their cash flow. Items that are using more cash than expected—such as phone, rent, shipping and postage, supply expenses—can be pinpointed. Income statements can also track dramatic increases in product returns or cost of sales. They can be used to determine income tax liability, while the cash-flow plan cannot.

Income statements contain some of the same information found in cash-flow statements, but in greater detail:

• Sales revenues.

This is not just the revenue generated from normal sales, but also any derived from sources other than a company’s core business (such as any income generated from renting company space for a party).

• Cost of sales.

• Gross profit.

• General and administrative.

• Depreciation.

This annual expense takes into account the loss in value of equipment used in your business. Equipment subject to depreciation may include furniture, computers and printers. While depreciation is important to help reduce tax liability, it’s not actual cash leaving the business. This is one reason why an income statement cannot replace a cash-flow plan in determining how much cash a business has.

• Gross net profit.

• Taxes.

Ouch—you knew they were coming soon or later.

• Net income.

This is the amount of money left after the business has paid income taxes.

It is very important to build an income statement appropriate to your business, so work with your accountant. Income statements, along with balance sheets, are the most basic elements needed by potential lenders, such as banks, investors and vendors.

They will use the information to determine credit extension and financing eligibility.

Balance Sheets

What’s on the balance sheet? Balance sheets list a company’s assets, debts and owner investments as of a specified date. What is a balance sheet used for? A balance sheet helps a business owner quickly get a handle on the financial strengths and capabilities of the business. Is the business in a position to grow and expand? It can help identify and analyze trends. Can the business easily handle the normal highs and lows of revenues and expenses? Or should it take immediate steps to boost its cash reserves?

A simplified balance sheet includes assets (what a business owns), liabilities (what it owes), and equity. Equity is the money a business owes its owners after all creditors have been paid. It is also the book value of your business. As with home ownership, you’d like to see the value—the equity—of your business increase without taking out a second or third mortgage.

Okay, where do you start? First, it is probably time to set up that meeting with your accountant. Review the cash-flow plan, income statement and balance sheet, line by line. Maybe take a financial management class or find a coach who will not only explain the workings of financial statements, but also hold you accountable for putting the numbers into action.

Build a 12-month cash-flow plan and get into the habit of working with it weekly. Only through becoming familiar with your numbers will you become proficient at understanding them. Also, share these numbers with your team, using scoreboards and huddles to help communicate the company’s goals.

While sharing the numbers may seem scary, it’s less frightening than enlisting your entire team in moving your company forward. Your financials are your company’s scorecard, and you can’t expect your team to play to win if they don’t know the score.

Neil Ducoff , founder of Strategies and author of the book “No-Compromise Leadership,” developed the team-based pay concept more than 30 years ago and developed a company that trains and coaches to ensure businesses implement the program successfully. For more information, visit www.strategies.com. Your financials are your company’s scorecard, and you can’t expect your team to play to win if they don’t know the score.