Doing a Number on Your Business: How to Understand (and Discuss) the Financials

Numbers: the mere word makes many people cringe. Take my wife – she is far more intelligent than I am, but when she sees numbers, she breaks out in hives. She is not alone.

I teach 60+ MBA students every year and train countless other executives; many of them do not like numbers. These are very smart, successful people, and I often find myself explaining that you do not have to like numbers, but you do have to respect them.numbers pull quote

Bottom-line: you cannot survive in business without a healthy understanding of, and respect for, the numbers. You don’t have to aspire to be a CFO, treasurer or investment banker, but you do need to be “conversationally competent” in the financials of a business.

Focus on the right numbers

In fairness, my undergraduate degree is in accounting, so I have a natural appreciation for numbers. But if you are willing to read a little further, I think I have a plan that can put even the most “numbers resistant” members of the Front and Centered community on a path to managing any hives, although I can’t promise to eliminate them entirely. Here are a couple rules you need to follow:

  • Keep it simple. Remember, you are not trying to get a finance or accounting degree, you are trying to manage a business, or in some cases, a piece of the business.
  • Trend it. Always look at trends over time to see if there is a story in the numbers, good or bad. Stories based on facts will always help you manage the business.
  • Strategy first. In order to understand numbers, you need to first understand the business strategy. You need to answer one simple question: “How do I plan to compete?” with either “Low cost” or “Differentiated.”
  • Limit your focus. Do not worry about ALL the numbers, but rather isolate the critical ones. Your plan to compete will tell you the critical type of metrics to consider:
    • A low-cost provider makes money by driving velocity or volume in the business
    • A differentiated provider makes money on margin; therefore, they need to sell things with a greater spread between the price they charge the customer and what it costs to make the product or service.

Forget “T” accounts. Lose the debits and credits. If you’re still with me after that nerdy number speak, try focusing on learning how your company makes money. Keep this discussion simple. No matter what business you are in, the way you make money follows a simple formula:

Revenues – Expenses = Profits

Revenues have two variables: volume and price. If you are low cost, you will need lots of volume to make money. If you are differentiated, you will need to charge higher prices.

Expenses are the dollars you spend to bring your product and services to market. Accountants like to use fancy acronyms likes COGS (cost of goods sold) and SG&A (selling, general and administrative expenses), which are important to what they do and actually important to benchmark and compare, but not necessary for understanding the business.

The activities you do, the things you sell, the customers you have, and the market you are targeting can change, but the formula will not. Really understanding it will be a valuable tool that will benefit you, wherever your career takes you.

Start crunching

Go ahead and test this out. Look at your company’s monthly financials. Next time you participate in a budget or planning session, try my hive-minimizing rules to break down and better understand the numbers. In doing so, write down the story it tells you. And write the honest story. Don’t write what you think someone wants to hear, but rather write what the numbers really say.

You may just spot a trend or an issue that others missed because they were busy calculating the numbers, and not understanding what those numbers say about the business. Like anything else in life, you will never know until you try, and it’s never too late (or too early) to start.