The Financial Elephant in the Boardroom (and Management Meetings)

Ed Patton

7 days ago

3 min read

Updated: 5 days ago

Without clear and concise reporting of financial fundamentals, a business's corporate governance is incomplete.

The elephant nobody names

There is an elephant in board and management meetings — a lack of comprehension of the business's core financial fundamentals.

It isn't for lack of information or intelligence. Leaders can walk into meetings surrounded by detailed financial reports, dashboards, KPIs, ratios, compliance materials and technical jargon.

Every number is accurate.
Together, they can result in noise.

Ask those leaders how it feels, and you can hear the same words: confusion, clutter, TMI, sensory overload.

More data hasn't produced more understanding.
It has buried it.

Small and midsize businesses face the same problem from the opposite end of the spectrum. Lacking the staff or resources to report much beyond the monthly general ledger close, their leaders have too little financial information rather than too much, and the fundamentals stay just as unclear.

Where the chain breaks

For financial fundamentals to be understood, they must go through four steps, in order:

1. Defined: what exactly are financial fundamentals?

2. Calculated: how are the defined financial fundamentals calculated?

3. Summarized: what does it say, at a glance?

4. Reported: who sees them, how and when?

Here is the problem. In most businesses, the financial fundamentals are never defined. And what isn't defined can't be calculated, summarized or reported.

The chain breaks at step one. Hence, financial fundamentals are not comprehended by business leaders.

Reports fill the clarity gap with everything else. Driven by FOLSO™, the Fear Of Leaving Something Out, every metric goes in, just in case.
Leaders become decoders instead of decision-makers, and management and the board govern in a financial fog.

Start with the definitions

The fix begins where the chain breaks: defining the core set of financial fundamentals. The 5 Elements® of Financial Fundamentals do exactly that, framed as a journey (or means to an end) to a destination (end results).

The journey (the means)

1. Cash Flow, measured as Foundation Cash Flow™.

2. Operating Earnings, the operations component of EBITDA.

The destination (the results)

3. Liquidity, liquidity amount (and target) measured in dollars and not ratios (short-term capital measure).

4. Value, shareholders' value (long-term capital measure).

5. Borrowing Capacity, the term debt the company's cash flow can support (long-term capital measure).

These destinations are reached every reporting period. They are only points along a financial continuum, constantly being driven by the dynamic forces of the past and ongoing journey. Therefore, effective corporate governance requires that these causes and effects be properly defined and continually reported in a comprehensible manner.

Once financial fundamentals are defined, the rest follows. They can be calculated consistently, summarized on a single page and reported first, with the detail kept behind them.