Add value in business meetings, join the finance discussion.

What is one of the easiest ways to get a good understanding of accounting and finance fundamentals?

I am frequently asked this question by non-accountant business professionals who want to be part of the finance discussion in business meetings. Many managers and executives won’t dip a toe in the water and comment on the numbers unless they’ve had quite a bit of experience. No-one wants to put their career at risk by asking a ‘silly question’. But the time soon comes where remaining silent is not an option and building financial capability is a priority for future career success.

Accounting and finance is a technical area of expertise – there are a lot of rules. It can take time to learn the fundamentals, what questions to ask and what numerical patterns are important. Besides investing in some formal coaching and training to arm yourself with some foundation knowledge and skills, one of the best ways to get up the curve quickly is to become involved in an on-the-job forecasting (budgeting) process. Here’s why.

1. Linking business drivers to results

Creating a financial forecast starts with agreeing assumptions about activities required to reach strategic goals of the business. A lot of this information (products and service volume, prices, unit costs etc) will be more familiar to you. Working closely with the finance team to agree assumption inputs you’ll also see how these drivers map to different items in the Profit and Loss (P&L), Balance Sheet and Cash flow statements. Next time you’re faced with the financial results you’ll have a renewed confidence knowing what is included in each item.

2. Building a sense of relativity

An executive who took on a board director appointment recently exclaimed to me “I know what things are in financial reports but I just don’t understand what movements warrant further investigation! How do I know when I should be concerned?”  At the time this executive didn’t have a strong sense of relativity between the business activity and the financial results. Understandably it was difficult for him to draw insights.

Good financial forecast models allow you to quickly understand the financial impact of different business scenarios. What would happen to profit if prices on the highest selling product fell by 25%? What would happen to profit and cash flow if you hired twenty new sales staff? Can you afford them all at once? Running scenarios gives you a sense of relativity and a deeper understanding of how certain business risks or opportunities impact the results. So when the year passes and business activity didn’t go exactly to plan, your knowledge of relativity will help you understand the actual variances of year-on-year results. More importantly if variances don’t synchronise with your combined knowledge of business activity and relativity, you know it’s time to start asking questions!

3. Deepens your understanding of accrual accounting

Many forecasts will include both Profit & Loss and Cashflow statements projected out several years, but it depends on the purpose of the forecast. Being involved with a variety of forecasting processes will help you understand why there are timing differences between these vital performance statements. It's a great opportunity to follow the impact of a particular transaction on the P&L and Cashflow.

So have a think about buddying up with the finance folk. They'd love a visit.

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