Nobody Can Use Numbers They Have Never Seen
Why financial leadership sits with your senior team, not your finance function
The paperback edition of Developing Financial Leadership in Small-Medium Businesses has been out for a month, and we are halfway through Know Your Numbers with QuoLux™, the ten-week series of clips on our YouTube channel in which Dr Stewart Barnes and Professor Malcolm Prowle talk through the ideas behind it. Across the book and those conversations, one theme keeps returning and it has less to do with accounting than you might expect.
In most of the SMBs and family businesses we work with, the financial information already exists. The management accounts are prepared, the cash forecast is on a spreadsheet, the year end goes in on time. Having a senior team who understands what those figures mean for the decisions they're about to make, though, is far less common.
Management is the toolkit. Leadership is whether anyone uses it
Malcolm draws the distinction cleanly in clip three of the series. Financial management is a set of techniques: investment appraisal, activity-based costing, budgeting, variance analysis, working capital management. All of it is well documented and built into software your business is probably already paying for. Financial leadership is the work of making sure those techniques are understood and used by the people running the business, instead of staying locked in the finance function or in one person's head.
Framed that way, the gap in most SMBs becomes easy to spot. The techniques are available to everybody, so the real question is how many people in your business could use them and whether anyone has ever asked them to.
Most businesses never write it down
Around 65% of SMBs operate without a written business plan, a figure Stewart returns to in clip four. In family businesses the proportion tends to be higher still, and for reasons that make sense from the inside. The plan does exist: it lives in the founder's head, refined over twenty or thirty years of trading; it's usually a good plan, built on judgement that no consultant could replicate.
It works well enough until somebody else needs to use it. A senior team cannot challenge a plan they have never seen written down, so the founder's assumptions go untested for years and the plan carries on unchanged. Owner-managers usually discover this at the worst possible time. A buyer makes an approach, or a large capital decision has to be made inside a fortnight and the senior team has nothing to reason from.
Try a simple test. If you were away from the business for a month, could your senior team make a significant financial decision in your absence? And - actual decision aside - would you be comfortable with the reasoning they used to get to their decision?
Succession is a financial handover before it is a legal one
In a family business especially, the month-away test stops being hypothetical at some point. Sooner or later somebody else does take over the financial decisions, and often with less warning than the family expected. Transferring shares is an administrative exercise. But transferring the financial understanding that sits behind two decades of decisions takes far longer, very rarely happening by osmosis.
The next generation often knows the business intimately at an operational level, the customers, the products, the people and the seasonal rhythms. Very often though, nobody has shown them how the money works: which of those customers and products actually make the profit, which parts of the business cost more than they bring in, what happens to cash when sales slow for a few months or why the big decisions of the last ten years were made the way they were. Families who handle the handover well start teaching this early while the founder is still in post and can explain the reasoning first hand.
You do not need a finance director to begin
Many owner-managers and senior leaders may respond at this point that the business cannot yet justify a full-time finance director. Bringing in senior finance capability is a real decision with a real cost, and clip seven - still to come in the series - deals with when an owner-manager should make that move.
Financial leadership does not have to wait for that hire though. It starts with the people you already employ. Show a production manager which products earn the most per hour of machine time and they will schedule the week differently. A sales lead who has seen how long the business waits to get paid will think twice before agreeing sixty day terms to win an order. Neither of them needs an accounting qualification to be able to do that - they need someone to show them the figures, explain the reasoning and then expect them to use it.
Four things to do in the next six months
1. Choose three numbers that really drive your business and go through them with your senior team every month. Explain why each one has gone up or down instead of just reading out the figure.
2. Ask each of them to talk you through their last big decision and the figures behind it. If they find that hard, you have found something to teach them.
3. Write the plan down, even if the first attempt is rough. Once it is on paper your team can argue with it, and that is when it will start to improve.
4. Put one financial topic on the senior team agenda every month between now and the spring, whether that's pricing, cash or how you weigh up a capital purchase. Twenty minutes a month will do more for them than a day out at a training course.
Developing is the operative word
Stewart and Malcolm's publishers were insistent on the word "developing" in the title of the book, and they were right to be. Financial leadership is a capability that people build over time. We have spent fifteen years at QuoLux™ watching business leaders learn leadership; before joining us, finance is nearly always the part they have had least help with.
Developing Financial Leadership in Small-Medium Businesses by Dr Stewart Barnes and Professor Malcolm Prowle is available now in paperback.
Five clips of Know Your Numbers with QuoLux™ are on our YouTube channel, with five more to follow. If you would like to work on this alongside other senior leaders, our next LEAD™ programme starts on 5th and 6th November. Please contact us here for more information.
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