Finance: The missing lens of leadership

Imagine you are running a marathon without checking your pace and hydration. You feel strong in the beginning, so you push harder. But halfway through, exhaustion hits, and by the time you realize you’ve gone beyond your limit, it’s too late.

That’s exactly what running a business without financial understanding is like: plenty of effort, but no certainty you’re moving in the right direction.

Finance isn’t just for accountants and CFOs. If you’re a leader, it’s a must have skill. It should be your language of business and decision-making.

CHALLENGES EVERY LEADER ENCOUNTERS

Leaders often face situations where the numbers seem positive at first sight, yet fundamentals raise concerns. Getting the insight behind the numbers is critical to make well-founded decision.

Let’s look at three moments where financial understanding can make or break a business:

REVENUE APPEARS STRONG, BUT PROFIT IS SHRINKING

It’s tempting to think that more sales automatically mean more profit. But without understanding contribution margin, a company can end up selling more while making less profit.

My previous client, a furniture manufacturer aggressively pushed a new product line to capture market share. Focused solely on boosting sales volume, the company priced the new series without taking production costs into account. As a result, each unit sold had a negative contribution margin, and overall profit fell despite rising revenues.

Leaders who have a clear understanding of product profitability and break-even, don’t just chase revenue, but maximize profitability.

THE COMPANY IS GENERATING PROFIT, YET FACING LIQUIDITY PROBLEMS

Plenty of profitable companies go bankrupt simply because they run out of cash. Rapid growth and expanding operations can quickly drain cash reserves, as funds are tied up in inventory, receivables, and operating costs. Also, many times, companies face difficulties in turning profit into cash: extended customer payment terms, slow-moving inventory increase working capital needs can strain liquidity.

Back in the last decade, the Carillion case made headlines. The British multinational company specializing in construction and facilities management services reported a positive EBITDA of £350 million in 2016. This indicated that the company was generating profits from its core operations, but… the company faced difficulties in converting its profits into actual cash, largely due to long-term contracts that required upfront costs. Carillion’s debt burden was also huge due to its aggressive expansion strategy. Even though the company reported operational profits, its overwhelming debt, cash flow problems, and mounting liabilities made it unsustainable. The British giant finally went into liquidation in 2018.

This highlights the importance of considering a company’s overall financial health, including its debt levels and cash flow rather than relying solely on EBITDA when assessing long-term viability. A financially literate leader understands that profit is not the same as cash and keeps a constant eye on both.

PROJECTS THAT FAIL TO PAY OFF

A new machine or technology may look appealing, but is it truly worth the investment? While a higher-capacity machine can bring clear benefits, the key question is whether it generates enough returns to cover the initial cost.

Imagine a manufacturer, considering purchasing a robot for assembly. While it could reduce labor costs and increase production, the high initial investment, along with additional maintenance and electricity expenses, would extend the return on investment beyond ten years, turning the sleek technology into a risky bet.

Leaders who can calculate ROI see beyond the excitement of growth and will make data-driven, objective decision.

Myths we should forget about

“Finance is just accounting.” “The accountant will handle it.” No. Accountants record the past, leaders look ahead and make data-driven decisions.

“As long as revenue grows, we’re fine.” No. Revenue without margin is just busy work.

“Finance is too complicated.” No. Leaders don’t need to become financial professionals. Integrating financial approach into leadership doesn’t mean mastering accounting rules. It means having the confidence to connect the numbers to strategy.

In reality, the key metrics what drive value-creation and long-term growth are enough to steer most strategic decisions.

A few simple practices

• Engage with reports. Understand what the numbers really tell you about the performance. Identify risks hidden in the numbers. Don’t wait for quarterly or annual statements, get monthly snapshots. Include a visual summary of performance indicators in the report
• Track key metrics. Choose a few metrics that truly critical for your business model (e.g. gross margin, EBITDA, cash conversion cycle). Monitor them consistently.
• Set up early warning signals. Use indicators that quickly highlight red flags (e.g. overdue payments, outstanding receivables, inventory level).
• Forecast and budget strategic moves: Plan the financial impact of your strategy, including investments, costs and expected returns.
• Apply scenario planning. Test simple what-if cases.
• Invest in learning. Participate in mentoring, workshops, online and offline courses.

In my experience, leaders who speak the language of numbers, decide more confidently, communicate better and earn greater credibility with investors, lenders, and their team.

The insight was written by Dóra Jánosi, Faculty member at SEED Executive School.

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