Business Finance Made Simple(r)
Use the “Money Slice” of the Welch Business Triangle to Unfog Your Finances
It’s Complicated
Finance and Accounting are complex specialties – complete with their own specialized terms, acronyms, complex nuances, and advanced university degrees. There can be infinite numbers, ratios, metrics, and KPIs connected to business operations. No wonder that Amazon lists over 15,000 English-language book titles on Corporate Finance and Financial Engineering.
Damned if You Do, Or Don’t
For senior leaders, the financial side of the business presents challenges whether or not you have a financial education.
If you do, it can be hard to pull yourself out of the minutia you know so well. Your very knowledge sucks you into the details. This article can serve as a reminder to resist digging into all the fine points and help you zoom out to the big picture fundamentals that ensure the health of your business.
If you don’t have a finance background – and many senior business leaders don’t – gaining a conceptual command of your business’s finances may look like a dark cave in a horror movie, “Don’t go in there! Can’t you hear the scary music?” It may look better to send a messenger into that cave. But you still need to be able to understand the report they bring back.
Financial Clarity in Five Questions
“Our CFO is going to retire in the next year or two,” a young, savvy, non-financial executive said to me. “Thinking about her departing, I realized I’m incredibly dependent – overly dependent – on her. I need a ‘macro level’ understanding of business finance so I can stand on my own and be smart enough to select her replacement.”
Since we had already determined that his concern lived in the Money slice of the Welch Business Triangle, I used a tested set of finance-slice questions to test and clarify his understanding of the finances of the business.
Do you know how you make money with the business?
Do you understand its costs and have a good idea about how they compare to competitors’ costs?
Do you understand what drives positive and negative financial outcomes?
Do you have a strong capital structure?
Do you understand and monitor the financial risks; and mitigate them in ways that make you feel comfortable at night?
From these five questions, we opened up a robust conversation, touching the most important elements of the company’s finances without getting dragged too far into the weeds. For example, we discovered he had heard plenty from associates about subordinated debt, senior debt, and the cost of equity. But he didn’t really understand how they knitted together to form a capital structure; nor what type of capital structure served the business best. In our next meeting, I brought some green, blue, and red poker chips as surrogates for “different colors of money.” When we were done, he had an unshakable understanding of capital structures, including his own company’s.
By gaining command of these five questions, he came to understand essential financial touchstones of the business. He made the connection between straightforward, verbally-articulated financial objectives and the numbers from the business. He was now in a position to stand on his own two feet, financially speaking. Plus he could have high-level conversations with prospective CFOs to assess their ability to provide what the business needed.
Insight Not Just Numbers
The “Money Slice” of the Welch Business Triangle is not fundamentally about numbers and math. It’s about gaining an understanding of the financial health of the business. That knowledge can be expressed in words, for which the numbers provide relevant supporting evidence. Knowing the answers to these questions serves the business. If the numbers help provide the answers, they serve the business as well.
