While there is general consensus that businesses look for leadership and well-honed strategic skills in their CEOs, roughly 30% of Fortune 500 CEOs spend the first few years of their careers developing a strong foundation in finance.
Shareholders and boards look for bottom line results, so sound financial performance is a necessity for companies. But on the other hand, businesses don’t want their CEOs functioning as bean counters who get so buried in the minutia of accounting that they miss the big picture of what’s going on with the business. These companies seek CEOs who can build revenue streams and reduce operating costs, decipher what the financial drivers are of the company’s business and get the most out of these drivers, and then foresee the likely financial outcomes of the decisions they make.
Research also reveals that CFOs are seldom called upon to assume the leadership of a company. About 20% of CEOs come from sales and marketing backgrounds, and the rest usually come from operations, with the position of chief operating officer (COO) being the most logical step-off point into the CEO’s seat. At Pfizer, CEO Ian Read began his career in finance, where he spent 10 years, but then transitioned into general operations. At Oshkosh, CEO Charles Szews built his career in finance, but spent three years as COO before moving to the CEO role.
CEOs at several of the companies I worked for used to go over financial ratios and results with employees at company or management meetings with the purpose of showing how the financials relate to company performance, and what they should be looking at in order to assess the health of the company. As an operational manager with a natural dislike for numbers, these meetings were like swallowing castor oil to me at the beginning, but I realized the financials were an essential part of leadership.
C-level executives should have command of at least these five finance essentials.
1: What the stakeholders and the board are going to ask
These financials historically come from a suite of statements that include balance sheets, income statements, cash flow statements, and shareholders’ equity statements.
- Balance sheets show what a company owns and owes at a specific point in time.
- Income statements show how much money a company made and spent over a period of time (typically a quarter).
- Cash flow statements show whether the company stayed positive or negative based on the cash flow exchanges with other companies over a specific period.
- Shareholders’ equity statements show changes in the shareholders’ company interests over time.
2: Net profit margin
The net profit margin shows the efficiency of a company in converting its revenue into profit. The formula for computing net profit margin is: Net Profit / Net Sales.
3: Manufacturing defects
If your firm produces physical products, you should measure product defects as a percentage of manufacture (e.g., 2% of product defects mean that 98% of the product is manufactured to specification); this can be used in industry Six Sigma programs. Most importantly, manufacturing defects is an indicator of how defect-free your production processes are, and whether you can anticipate downstream customer complaints and returns that can ultimately hurt business.
4: Customer churn
Advertising and marketing dollars go into building business, but you lose the investment when customer dissatisfaction rises and customers leave. Retaining hard-earned customers should be a primary goal of every C-level executive, and she should make it her business to know what the company’s customer churn (loss) and retention rates are.
5: Employee churn
It’s expensive to lose employees when you are constantly rehiring and retraining. Bank teller lines and call center staffs are notoriously high employee turnover areas; unfortunately, these same employees are often the “face of the business” for your customers. It is disconcerting for customers when they see constant turnover, and new ranks of employees aren’t very familiar with the products and services. This can negatively impact your company’s image, and its ability to sell.
What finance essentials would you add to this list? Tell us by posting in the discussion.