The CFO contacted me last night and wanted to get about 5 min this morning at our annual sales meeting.
The meeting begins – she steps to take her 5 minutes. All 10 salespeople in the meeting roll their eyes. She starts by saying, “I would like to commend all of you for growing our top line revenue this year by 15%. However, our net profit margin decreased by 16%, and we ended the year at a loss. I would like you to be more vigilant in the pricing of your deals to strengthen our margins and return to a profitable business. Any questions?” Dead silence. “Hearing none, thank you for your time,” and she leaves. All eyes are on the SVP of Sales. Then one brave person raises their hand and says, “what the hell was that? I have no idea what she was talking about other than the compliment she gave us.” The SVP of sales responds, “let’s get back to our agenda and look at ways of finding new customers.”
Does this sound familiar? Why? There are a couple of reasons. First, the CFO is speaking in the foreign language of accounting – not plain English – and she cannot translate accounting speak into English. Second, accounting has an image problem for non-accountants. It’s an image (or better yet, memory) of pages of mind-numbing numbers that make no sense, leading to ‘listener shut-down; creating a phenomenon that, in turn, leads to a lack of financial acumen within your organization.
So, what is the antidote to this mind-numbing issue? Leadership. When searching the internet looking for keywords as it relates to the topic of leadership, you will find the following: confidence, charismatic, motivation, success, inspiring, trust, vision, influence, people, accountability, courage, humor, respectable, and making good decisions, to name a few. I agree with all of these, except that there is one missing – financially responsible in every list I researched.
The best and most effective leaders have a good working knowledge of the company’s financial health, and their decision-making process is established in the organization’s financial truths. Armed with this financial acumen, the effective leader can influence decision-making by conveying the tactical connection between the mission statement and the financial statements.
Let me pause for a moment and stress that this financial acumen is not the CFO’s sole responsibility. It is the responsibility of everyone who is in a leadership role within the company. Financial acumen should be the basis of understanding in every business conversation and decision made within an organization.
Think about it this way, who are the people in your organization that is making decisions? How many decisions are made every single day in an organization? What percentage of those decisions have a financial impact on the organization? 75%? 80% 100%? There are leaders within organizations that don’t understand accounting and finance fundamentals—for example, the lending department within a bank. Lenders are the salespeople of the bank. They’re responsible for generating deals for customers so that they can lend money to them and grow the bank’s business. We all know that – right.
However, these lenders can earn a bonus on the cumulative dollar amount that they lend. Do you see what is missing here? You are incentivizing the lenders on revenue generation and not profitability. This is and has been a recipe for loss in profitability. What is missing is taking into consideration the loan costs.
I hear stories from CFO’s about how the sales team needs to grow their business by 25%, and yet in the process, they lose 15% in profits. In my interview with Ken “Mr. Biz” Wentworth, he calls this phenonium ‘the silent killer’ to all businesses. He shares a story of one of his construction clients wanting him to review a bid on a new piece of business. After reviewing, he advised the client not to bid on the work at that price and raise the price by 25%. The pushback from the owner was that they needed to bid low so they could get the job. Ken, knowing the cost structure of his client’s business, responded, “You can bid the job at the lower price, AND you will lose $40,000 on this job.” The owner replied, “I am bidding it low to get my foot in the door for future work.” Let’s stop right here. We all know that is a falsehood because when the owner asks for a bid on another project and we give our full-pricing structure, what do you think the owner will do? That’s right. Find someone cheaper. I have used that strategy in the past, and it hurt my business.
The silent killer of a business is not understanding the fundamentals of accounting and finance. We need this understanding and knowledge to make more informed, smarter, and more profitable decisions. If you understand accounting, you can understand finance. If you understand finance, you can understand your business.
When your leaders are in meetings and the conversation shifts from operations to finance, are your leaders participating in the conversation or just witnessing the conversation?
The solution is leadership. Financial leadership. The next time you have your leadership team participate in a leadership development program, add a day of accounting and finance fundamentals. Oh, I know…. I can see all of your bitter Grinch faces. You are thinking, an accounting course. Oh, hell no! I’d rather have a root canal without any novocaine than sit through a full day of an accounting and finance course. This goes back to the image problem accounting has – and it’s a big image problem! And it exists because of the traditional way of teaching accounting to non-accountants in the same way we teach accounting to accountants. That’s like teaching any subject in a foreign language that the students do not understand – it’s impossible to learn!
We need to teach accounting and finance to non-financial leaders in a different way. We are not trying to turn them into accountants but rather into leaders with financial acumen. We want to help them gain access to critical knowledge in a manner that removes the complexity of accounting/financial jargon and teaches in plain English.
The solution to this puzzle is a product that is offered by the company Wealthvox. The product is accounting and finance fundamentals powered by Color Accounting. Color Accounting is a learning approach that makes accounting simple. The courses deliver real financial literacy quickly and effectively. Accounting and finance often feel confusing because people can’t see how the numbers work or understand the language. Color accounting fixes both issues by approaching the subject visually.
This unique, visual framework enables us to use simple concepts to explain the mechanics of accounting and the structure of financial information. The language of accounting is then brought to life with logical and intuitive examples.
All of this is achieved interactively and engagingly, enabling you to build a holistic understanding of how financial information tells a business story.
The really cool aspect of color accounting is that it is delivered without the use of PowerPoint. That’s right, no PowerPoint numbing slides. It is delivered visually using flip charts or whiteboards and hands-on materials that include a manual and a pop-up board.
After a six-hour workshop, you will be empowered to:
- Analyze and interpret financial information with more confidence
- Understand the story of a business using key financial metrics
- Understand the relevance of key profit measures such as EBITDA
- Engage confidently in internal financial conversations
- Improve communications with clients, customers, and colleagues
- Understand the financial process in your business
- Improve financial decision-making in your business
- Manage profits and cash flow more efficiently.
- Price your products and services more profitability
- And more.
The results are remarkable. Westinghouse is a client of Color Accounting, and before the pandemic, Color Accounting delivered over 30 workshops to their leaders, project managers, and engineers. I had the privilege of leading one of these workshops in January 2020 to a group of 24 project managers and engineers. By the end of the full six-hour workshop, this group had a greater understanding of their role within this large organization and the financial impact on the wealth and bottom line of the organization. As this group left, they were all thanking me for the engaging and thought-provoking workshop and that their mindset towards accounting had become completely different.
There is a case study that Wealthvox has written, and here is a small portion of that case study:
At this point, we delved into a section explaining the differences between the two M’s – gross margin percentages and markup percentages.
A margin is sales minus the cost of goods sold. A markup is an amount by which the cost of a product is increased. I explained that when you apply the markup percentage, that will give you the resulting but lower margin percentage.
The MD of Home Chefs, Rupert, turned white. He held his head in his hands and asked us for an example. To clarify, we applied a hypothetical scenario. If a Home Chefs’ dinner for four is £100 minus costs of £25, there is a margin of £75. This is a margin percentage of 75% but a markup of 300%.
Rupert sighed and said: “This explains a lot. We haven’t been getting the profitability that we wanted, and this is why!” His company had been trying to achieve a 10% margin when they were, in fact applying a 10% markup. He went on to express that he’d had an uneasy feeling. He knew something wasn’t right but didn’t know what was wrong. The problem with applying the 10% markup is that you actually end up with a margin of 9.1%. To achieve a 10% margin, the markup percentage needs to be 11.1%.
Rupert couldn’t believe that he’d mixed up something seemingly so simple, yet in fact, crucial.
One final example came about when I explained Color Accounting to a colleague who has a successful speaking and coaching business. The response back to me was, “I don’t understand accounting. I don’t like numbers. Never have. You will never get me to take an accounting course. I have run my business for 15 years, and it is very successful, and I have large to medium size clients.” So, I made this person a deal, take this course, and after six hours, if you are still lost, I will refund your money and add 10% more for wasting your time. DEAL!
We broke the learning into 2-hour chunks over three weeks, and it was delivered live using Zoom. Before starting the second week’s class, I ask if there were any questions or comments. My client commented, “Every morning this past week, I have woken up thinking about my balance sheet.” By the end of the class, my colleague could read and understand the balance sheet and the income statement AND was not afraid of accounting.” We are continuing this conversation because now my colleague is asking better questions about the business, starting with, are my products and services priced correctly? What are my expenses, and are some of my expenses non-productive and should be eliminated to increase my overall wealth and profitability?
When you switch the accounting and financial light bulb on and include it as part of leadership development, your leaders will make better business decisions because their business acumen has been fully achieved. Business acumen is built on a foundation of accounting acumen, plus financial acumen, and every leader should strive for this excellence.
If you would like to learn more about the Color Accounting process, please contact me at firstname.lastname@example.org.