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November 17, 2020

Get STUC: Forming Good Financials

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The most sophisticated company in the world and the small engine repair shop at which I dropped my weed blower off last week have at least one thing in common: they’d better keep an eye on their bank account—that is, their cash position. Some would say it’s easier for a small mom-and-pop operation to do this, while others would argue that it’s harder.

I will simply say that they’d both better do it, or they will find themselves in the shut-down line.

Every week, I meet with leaders who are setting direction, speed, risk, resources, and culture as per my book, The Five Tasks: What Every Senior Leader Needs to Do. And every week, the leaders at the top of the enterprises need financial information to make decisions to fuel each of those areas.

Over the years, I have determined that every leader needs good financial reporting. And I have also determined that good financial reporting includes these four elements that make up the acronym STUC: simple, timely, useful, and complete. 

Simple

“Be concise.” 

That’s the advice of William Strunk and E.B. White in The Elements of Style, a writing style guide beloved by English teachers, writers, and even Time, which named it one of the past century’s best 100 English-written books.  

Why was a writing style guide named one of the best books? And why do I mention it in an article about financials? Because producing financials is a kind of storytelling, and in the same way that no one wants to read writing that is too wordy and complex, no one wants to use financials that are too long and complex.

I am a huge believer in roll-up summaries from which the leader can work. That means you need someone to produce a one- to two-page report each month at least. This serves a few purposes: first, it saves you time; second, it highlights the most important information to direct your attention toward; and lastly, it puts the job of processing and thinking on the shoulders of the team below you. They can’t just mindlessly drop a two-inch binder on your desk and leave it to you to figure out the important details.

Keep in mind that if you’re not naturally a good simplifier and are in the weeds on finances, you’ll need to hire a simplifier. Whether it’s done in-house or by an outside contractor, someone needs to compile and condense everything into one to two pages.

Good financials are simple.

Timely

Imagine driving at night on a road you’ve traveled countless times. You know the way like the back of your hand, so when your headlights go out, you’re not too concerned. Then, your interior gauges go dark. You get slightly more concerned but decide you’ll still wait a month or two to get your battery checked.

Who would do that? You could run out of gas, a deer could run out on the road, orange cones could be set out for roadwork. You can’t just assume everything will go the way it has before.

Yet that is exactly how some organizations approach their financials. They go weeks or months into the new quarter or year carrying over numbers from the past to determine the budget—and before you know it, they’re out of cash. (Non-profits can be particularly bad at this.)

Look at your current team structure and see how quickly they can get you financials each month as they are. If that’s not fast enough for what you need, priorities need to shift or the team needs to change.

Good financials are timely.

Useful

Is the information you get every month or quarter the info you need to set direction, speed, risk, resources, and culture?

Albert Einstein supposedly had a sign on his door that read, “Not everything that counts can be counted, and not everything that can be counted, counts.” 

Einstein was obviously not talking about corporate financials, but the principle of focusing on the right things definitely applies. There is no end to the numbers that you can look at when analyzing a company or organization, but they don’t all matter. You’ve got to have a mechanism to quickly, easily, and accurately get what you need to make the right decisions. 

Figure out which gauges are most crucial and know that some numbers are more helpful than others.

Good financials are useful.

Complete

When my kids were growing up, I liked to say there is a difference between something being accurate and something being adequate. I would ask, “What did you do last night?” One of my kiddos would say, “I went over to Sam’s house.” And although that may have been accurate, it wasn’t adequate; it was incomplete—I also needed the info behind and around the info.

It is up to leadership to get the complete picture of the financial highway of the enterprise. It is amazing how many leaders try to guide their company using incomplete information.

Remember, a report is what happened; a scorecard is what is happening. Make sure you don’t get those confused. One advisor jokingly said he practices the rule of three, “If you read a company’s financial statements three times and you still can’t figure out how they make money, that’s usually for a reason.”

Good financials are complete.

Conclusion

As Ayn Rand said, “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”  And to be a good driver, you need financials that are STUC: simple, timely, useful, and complete.

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