“If you’ll kindly turn the page, the quarterly cash flow projection will surprise and delight…” ~ No CFO ever
Today’s boards invite at least one accountant to the party. We say that we need accounting talent at the table so we can oversee the audit and finance function. But I know the truth. We directors like having a CPA around so we know at least one director is reading the financial reports carefully.
It doesn’t have to be this way. In fact, financial reporting can be the launchpad of robust, insightful conversation among directors. It all starts with the information nestled in your quarterly board binder. Consider these 5 ways to restore life to your board’s finance discussions:
1. The board ― not management ― should drive the design of financial reports
When management designs the information presented to the board of directors, two challenges emerge: information asymmetry and inefficiency. With ample time to cozy up to financial results, management can cherry pick the financial information presented to the board. Instead, the board should outline an objective set of metrics by which to evaluate the business.
From an efficiency perspective, would you rather boil the entire ocean or just the cup of water you need? When management designs board financial reports, there is a tendency to throw “just one more slide” into the pack. In contrast, the board can request the information it needs and only that information.
2. The right financial metrics emerge from the questions the board needs to answer
Just as management can feel tempted to add one more slide, the board can suggest analyses that “might be interesting”. In most complex organizations, there are plenty of interesting analyses to run, but they may not yield action.
A board should begin with the end in mind. When designing financial reports for the board, we should be clear on how the data will fuel discussion and the action the board is likely to recommend when those questions are answered.
3. Paint a picture
A book editor friend of mine likes to say that “numbers are just another way of telling a story”. This is particularly true when we see the numbers as graphs. Before we draw conclusions from data, we should plot the data itself.
4. “Those unable to catalog the past are doomed to repeat it.”
Graphs are a great way to see financial metrics in terms of their history. How do we know if gross margin is problematically low without knowing what it has been previously? At the very least, we should compare current performance to the previous year and the maximum, minimum and average observations for the previous 3-5 years.
5. So what?
Now that we have a swingin’ board book, the board can really do its job. We can study performance at an appropriate level of detail. We can use past financials to gauge the strength of our strategy. And we can use this foundation to envision how our strategy might evolve in response.
So go do it. Dig in and drive a generative discussion, else all of the above is lost.
