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Webinar: Financially Fluent - Turning Board Reports into Better Decisions
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Do you want to feel more confident reading board financial reports without becoming an accountant?
This webinar will show you how to interpret P&Ls, balance sheets, cash flow, forecasts and key ratios, spot the signals that matter, ask better questions of management, and turn financial information into clearer, more informed board decisions.
While we're uh getting involved in today's uh this week's this week's um finance week. Um and we've had the um the pleasure of of partnering on this, which is which is great. Um so it's my pleasure to really welcome you to today's webinar. Um I'm joined today from the Trishanal Lands of the Waterong people. Um I'd like to pay my respects to Elders Past, Present, and Emerging, and also to any Aboriginal or Torres Australia Islanders that are on the call. Um we've got a large number of people from across Australia today, which is great. And I'd love to know where you are, where you're joining us from. So if you'd like to put that in the chat, that'd be great. I thought I'd just take a brief moment to share that we're running a competition this week as a community as a community director's partner and a partner of this week. We're excited to bring you this opportunity to win one of two $500 office work gift cards. So scan the QR code to find out more. Um, terms and conditions apply, and they can be found on the not-for-profit finance week webpage. Just a quick bit of housekeeping. Um, if you have any questions during the session, feel free to pop them into the chat and we'll do our best to answer them by the end, time permitting. You also you will receive the slides and the recording via the email you're registered with. Please don't use AI to summarise or record the session. And please mute yourself unless you're speaking. Um and just a note here say the information provided during the session is general information only and does not take into account your personal objectives, financial, situational needs. It should not be considered as financial advice. On that note, it's now my pleasure to introduce you to Roger and Stephen. Roger is a board chair, non-executive director, and audit and risk committee chair with two decades of board and executive leadership across strategy, capital raising, governance, enterprise risk, transformation, organisational performance, technology, AI, and cybersecurity. He brings judgment, commercial acumen, and strategic foresight to boards, navigating growth, complexity, and major consequential decisions. Stephen Bowman is majoring director of conscious governance and brings a great depth of experience facilitating board reviews and strategic planning processes. Stephen's held numerous senior executive CEO and board positions in USA and Australia, as well as authoring and co-authoring of 14 books on governance, strategic risk and executive leadership. So before we hear from the guard, I'll just hand you over to Sean.
SPEAKER_02Thanks, Cameron. So hi everybody. Welcome to our webinar today, titled Financially Fluent Turning Board Reports into Better Decisions. As Cameron said, we're joined by Roger Chow and Stephen Bowman. And uh my name, of course, is Sean McDonald, and I shall be your moderator with Lachlan uh in the background for the next 55 odd minutes. So thanks for attending today. We always appreciate you uh making the effort to be here for our live webinar events. Uh, during the session, if you have any questions, just pop them in the chat and we'll answer those as we are going along uh through the session. For those not too familiar with Board Pro, we are a board software provider, sometimes called a board portal, and we serve just over 35 odd thousand users around the world, about 4,000 boards and about 8,000 committees, would you believe? And we enable organizations to prepare for and run their board meetings more efficiently and effectively with less time and deliver more impact and value for the organization. And as much as we are a board software provider, part of our wider mission here at BoardPro is to make the fundamentals of governance free and easy to implement for all organizations, but especially those organizations uh with resource constraints. And one of the many ways we do these is uh do this uh is by providing free access to webinars that we host every week. And the many templates, guides, and white papers are hosted on the Board Pro resources page of our website. So for the next 55 odd minutes, just sit back and relax and add to the discussion by asking as many questions in the chat as you would like. Uh as Cameron said, the full recording of the webinar along with the slide deck and the transcript will be sent to you after the webinar. So we've all already had an introduction from Roger and Stephen. So let me start the uh webinar just here and off we go. Over to you, Roger.
SPEAKER_04Thank you, Sean. Thank you, Lachlan, and welcome everyone to Financially Fluent. As always, before we begin, I also do want to start by acknowledging that I'm coming to you from um the Dandong Ranges, which is on Wurundri Country, and pay my respects to the elders past and present. Um also really like to acknowledge the traditional custodians of the land from which everyone else is joining us today. Um, I think I saw in the chat that there were some people from New Zealand, from Fiji Islands, and any other couple of other places as well. Um so really just welcoming everyone along from the ride as well. Um so for today, it's pretty much broken into two parts. The first part really is a bit of theory um and then introducing you into some case studies where we start to apply some of that theory and put it into practice. But as was as Sean was saying, if you've got any questions at all, um feel free to put them into the chat. Um and Sean and the others will keep me posted if you've got any questions that need some answering from that perspective as well. Um and just bearing in mind we've also got Steve on the call who brings a wealth of experience and he'll probably pitch in with a lot of his knowledge and experience as well. So, to start off, like I said, I want to just try and set the scene with some of the fundamentals because I really want us to all to start from a common foundation. Um, because if you look at a finance pack in a board pack, it can be quite intimidating if you don't have an accounting background. So, as we can see up on screen, you might see an income statement, you might see a balance sheet, a cash flow report, some forecasts, some variances, some management reports. But I think the important thing to look at is when you're looking at each of these individual artifacts alone, they're simply different views of the same organization, but answering very different questions. And what I keep saying is don't just look at one of these. Don't just look at the income statement, don't just look at the balance sheet, look at them all together and ask the question of well, what does this actually mean? What's a so one? It's not so much about the numbers, it's about the implications. Because for us as board directors, we're not here to talk in in a lot of detail about finance. We're here to talk about governance. We're here to talk about strategy, we're here to talk about risk. And that needs to be our core thinking from that perspective as well. So if we start from the first one that we can see up on screen, which is the income statement. Now, this is sometimes called the PL as well, or the statement of financial performance. Um, but as its simplest, it tells us how much income we've earned and how much expenses have been incurred over that period itself. Now, that period might be over a year, it might be over three months, it might be over a month, whatever it is, but it's over a period of time. So just imagine we're six months into our financial year now, we've earned, say, four million dollars in income, um, and we've had $4.2 million of expenditure. So that gives us a $200,000 deficit. Now, I think as a board director, the important question is not did we make a surplus or did we make a deficit? We actually need to be asked, well, was this actually budgeted for? So if we are seeing a deficit, if we are seeing that deficit of, say, the $200,000, is it temporary or is it structural and ongoing from that perspective? Because the implications of a structural deficit are very different for directors compared to a temporary deficit from that perspective as well. The other key thing is what's actually driving this as well and asking those questions of, well, why did we have this unforeseen deficit? What's driving it? What does management now expect for the full year? Because whenever we're looking at these financial statements, it's always good, yes, to look retrospectively in terms of how did we get to where we are. But I think the equally important, or even the more important question, is actually, what does this mean for the future? What does it mean for our risk? What does it mean for our strategy? What does it mean for the consequences further down the track as well? Um, so we need to be asking management from their perspective, what does this mean for your future forecasts for the rest of the year as well? Because you as board directors, yes, you approve the budget, but when you approve budget, you're actually approving management's financial plan to deliver on the strategic plan itself, which you have set as a board. So comparing your actuals with the actual targets themselves really tells you whether the organization is tracking as expected from that perspective as well. So if we have have a think about this again, say we budgeted for a $50,000 deficit, um, but six months into the year, our deficit is now tracking at $200,000. So there's a bit of a variance of about $150,000. And again, like I said, the variance itself is not always the problem. A variance could be good, it could be bad, even if it exceeds the limit that we've set from a budget perspective. Um and there might be reasonable, there might be reasons as to why we've got a variance. Your grant might have been delayed, your grant payment might have been delayed for a week. Um you might have decided to pay your annual expenses, say your work cover premiums, a month in advance. Or you might have actually been able to recruit staff sooner than you expected. So there might be good reasons or positive reasons for why you've got a negative variance. So the question is not so much is it negative or positive, but while it caused it. What does it actually mean? What happens next? What are the key implications for a board director when it comes to the strategy side of the equation itself? So that's the income statement. Now, we've also got the balance sheet itself. Um, so unlike the balance sheet which covers a period of time, uh unlike the income statement which covers a period of time, the balance sheet is just a snapshot in time. So it's just like taking a photograph as opposed to a video. So it tells you broadly what an organization owns or controls minus its liabilities in terms of what it owes from that perspective, and then tells you its aggregate financial position itself. Now, like I said, that balance sheet is made up of your assets minus your liabilities, which leads to your actual position. Um, but if we have a think about what those assets actually include, it includes cash, it includes property, it includes accounts receivables, um, and then you've got those liabilities, which could include things like your um unpaid invoices from some of your suppliers, from some of your contractors, for example, um, some of your employee entitlements. It could include some of your loan or your lease obligations and other things as well. But I think one word of advice that I have for all board directors or anyone looking at the balance sheet from that perspective in a governance or strategy realm is don't just assume that a strong balance sheet means there's plenty of money available. Again, you can't read the balance sheet in isolation to everything else. Um, you might have, say, five million dollars in net assets, but four million of that might be tied up in the building where you're sitting at the moment. Um, and that yes, that building might have value as a four million dollar building, but you can't pay next week's wages with the building itself. So it really depends on the breakdown of those assets and the breakdown of the liabilities itself before you can fully understand the financial health or the financial flexibility of the organization itself from that perspective. So again, you might also have, say, a million dollars in cash sitting in the bank account. And that might look really good. But 800,000 of that might actually be tied up in restricted funding from government to deliver on particular programs itself. So, yes, you can look at headline assets, yes, you can look at headline cash in the bank, but it all doesn't always tell you the full story until you drill down deep into it. Um and that's why I say as board directors, it's not so much about the numbers, it's about the how and the why. And these are the questions and the drilling down that that needs to come from the board when they're working with the exec team around some of these from that perspective as well. Um, this is probably a good segue then to that third piece, which is around that cash and working capital component as well. Because you can have a surplus. You can have a surplus if you're looking at your PL, but you can still have cash problems as well because they're telling you a different story. So, as we know with accounting, it's generally prepared on accrual on an accrual basis. So income and expenses are generally recognized when the relevant economic activity or the service is actually delivered under the accounting standards, not when cash actually enters or leaves the bank from that perspective. So you might deliver a million dollars worth of services under a government contract, and you might have satisfied the relevant contract obligations or the relevant reporting obligations for that government contract, and you will recognize that $1 million as revenue today when you're looking at your income and expenses itself. But the government department, on the other hand, might only be paying you 60 days later or 90 days later. So there's a bit of a lag between the cash flow statement potentially and the income statement as well. Um, and just because you've you've recognized that million dollars on your income statement doesn't mean you've got that cash available to pay your staff or your rent or your insurances and other things as well. So an organization can report a surplus looking at the income statement, but its cash position can still be under considerable pet pressure as well. And that's why I say don't just look at each of these individual artifacts in isolation, look at them as a whole from that perspective as well. Moving on, the other key thing to look at as board of directors is also the forecast. Um and I think if I think about what I look at personally and what I find most valuable, I probably find the forecast more important than just the year-to-date result. Um because again, as I was saying, that year-to-date result tells you what's happened prior to this. But I actually want to know where are we heading in the future? What does management think in terms of where they think we're gonna end up or where we're heading from the future in the future as well? Um, and yes, as a board, we might have a budget where we expected to have a hundred thousand dollar surplus now, but six months later, it's looking like based on the forecast, we're gonna be 400,000 in deficit. Um, and again, we as a board need to be asking questions around actually what's changed? Is that forecast credible? And I guess the other key thing for me is actually which of these assumptions actually matter the most from my perspective. Um, and I'll I'll just pause there for a moment because I think this is probably one of the crucial questions that I really I like to get all directors to ask around assumptions because if we think about our business cases, we think about our business models, we think about budgets, they're all based on assumptions. Um and if if that assumption holds true, that's all well and good. But if the assumption changes, that's gonna lead to different implications for our forecast and our end result as well. Um so what I always like to do as a director, or what I always like to do as a board advisor when I'm working with other boards is actually ask them, well, what would have to be true for this forecast to be right? What would have to go, what would have to um to work out for this forecast to be actually right in terms of our assumptions? Now, does that depend on a major contract being signed? Does it um depend on your vacancies being fulfilled in a certain time? Does it depend on a particular level of fundraising to being achieved? These are probably the more critical questions around those assumptions and um the actual numbers themselves from that perspective as well. So the final one that we've got up on this slide is the KPIs and the management commentary. And again, this needs to be read in concert with all the other four that we can see on screen from that perspective as well. Because this commentary really connects that financial result to what's actually happening on the ground in that organization itself. Um, because yes, you might have staff costs that are up, and they might be up by 10%, and that might show through in the budget when you're looking at that from that perspective. Um but what does that actually mean in operational terms and why has that actually occurred? And I think that that's probably some of the key questions from that perspective. Because, like I said, this is not just about the numbers, this is about the so what, it's about the implications from that perspective as well. Um and that's why this is really important to be read in concert with all the other elements from that perspective as well. Um because if those staff costs have gone up, that might be because, well, their their wages have gone up for whatever reason. It might have also been that demand for service has gone up and unexpectedly, and we've had to bring on board agency staff, which are more are more expensive. But that might be a positive because demand for the service has gone up. So again, there's there's no hard and fast rule until we start to understand some of the information and data a bit more. Because what we're really trying to do is have a governance discussion. We're not here to have a pure finance discussion. We're here to have a governance discussion about the so what's and what that actually means from that perspective as well. Um, so with that in mind, as we start to move through this webinar, as we start to get through some of these case studies in broader detail, it's not about memorizing every single accounting term. It's not about interrogating every single number. It's actually thinking about how these reports actually connect together. Um and if these different views that we're seeing up on screen, the PL, the balance sheet, the forecasting and everything, if they're telling a consistent story, that's great assurance as a board director. But if they're starting to contradict each other, that's really where you as board directors need to be probing and asking those questions as well. Um, because if management says their performance is strong, but cash is falling, you need to be asking why. Um if your balance sheet looks really healthy with substantial reserves, but management keeps saying actually there's no money to invest, again, you need to be asking why, how, what does this actually mean from that perspective? So I encourage you all to look beyond just the numbers and start to ask some of these more strategic so what questions when you're working with management and starting to digest some of these reports from that perspective as well.
SPEAKER_01So if if if I can add to that, Roger, I think one of the most powerful things you've said in all of that is is using that word assumptions. Um, what some boards have done that's really powerful that that those of you who are on this call may consider looking at is uh once a year, go back to some decisions that were quite large decisions that were made three or five two or three years ago. Look at the assumptions behind those decisions, and then work out whether we got those assumptions pretty right, or if we didn't, what have we learnt from that? So one of the things that we find many boards don't do as well as they could is actually look at how they make decisions and whether their assumptions were robust enough. And if they weren't, then what did we learn from that? So having a look at you know major decisions that were made two or three years ago and just doing a review of the two assumptions behind this were A and B. We got A pretty much right, so we did well with that in terms of how we do it. Now, B, we were off. The reason we were off is X, Y, and Z. What have we learnt from that so that when we next make assumptions, we're doing a better job of that. Roger, back to you.
SPEAKER_04Thank you, Greg. Um, Steve, some very sage advice around that continual learning process for boards. And I think that's a really important skill for boards, that self-reflection and ability to say, actually, we made a mistake. We made the wrong assumption, or we haven't monitored this appropriately, because that's only how your governance is actually going to improve from that perspective. So, really some wise words there from Steve. Thank you.
SPEAKER_01Um there's a couple of questions here, Roger. Can we just take a minute to maybe have a look at them? Patrick's asked, when should you move from cash accounting to accrual accounting for reporting? Thoughts?
SPEAKER_04So I think I'd say best practice is moving towards that accrual accounting perspective. But again, I think for very immature smaller organizations, it can be quite a substantial shift. Um, but if you're really starting to be more strategic about your finances, because as we've seen, there is a strong difference between your income and expenses and when cash actually flows. Um, and if you're basing everything on cash accounting, it won't always highlight the red flags in your organization. But at the same time, there's a significant transformation piece required to uplift an organization which is very cash focused towards an accrual focused. So again, there's no hard and fast rule. It depends on the maturity of your organization. But I'd say it is best practice to move towards an accrual approach.
SPEAKER_01And one other question, Margaret's asked on this particular slide, what is usually inside the finance section of the board pack? What's the optimum for each of the boxes, yeah, for the income statement and so on? So, what's the optimum amount of information in there?
SPEAKER_04So I'd say more is less. And what I always look for when I'm working with boards is I actually like the commentary that actually comes with some of this. Um, the other thing that we'll see when we get to the next slide is some ratios, which I find really important. But when I'm looking at these as a director or when I'm working with boards, I I love to see not the line items, because we're not looking for management level detail across everything. We're trying to see trends. Because as a board director, what we want to see is not just where where are we now, but we want to see actually how has the trend changed? Has it changed from a year ago? Has it changed from six months ago? What's it looking like a year from now, two years from now? And that's why when I work with boards, I always say to them, don't just look at where we are now. I want to see a cash flow forecast. I want to see your projected balance sheet a year from now. It's not always about now. So with the with each of these items that we're seeing on screen, I think, yes, it's great to have the detail of how we got here, but we also want some high-level info about what does this mean for the future as well.
SPEAKER_01Okay, just on that, sorry, um, going back to Margaret, she wasn't, she's saying, what's the optimum for income? What's the optimum for the balance sheet? What's the optimum for the cash? And in its in essence, that's a board decision. And it's a great question you're asking, Margaret, because you know, we have a uh liquidity ratio. What's the optimum? You know, what's the anything below that, anything above that in terms of uh in terms of uh uh surplus? Yeah, is there an optimum surplus? Whereas anything above that, we're growing too quickly and we could be at risk of falling over. So these are the questions that the board should ask. What is the acceptable range for these things? And if we're outside of those acceptable ranges, then what do we agree to do in advance of anything occurring that gets outside of these acceptable ranges? And I think Roger's gonna cover that more when he starts looking at ratios. Which is my favorite topic.
SPEAKER_04Roger, over to you. Spot on Steve. And I think the umbrella approach to that is actually there's no hard and fast rule. So whenever I'm consulting to and working boards, they always ask me, what should our current ratio be? They're always asking me, well, what should our cash flow runway be? Should it be six months? Should it be three months? And my answer, as we'll get through when we go through this slide, is it depends. For every organization, it's different. And we can see that when we start to understand the definition of some of these as well. So let's move into that. So if we're looking on these slides, we can see some of, I guess, the four ratios that I see most useful when working with boards. And the first of those that we can see up on up the top is the operating margin. Now, at its simplest, it tells you whether your ordinary activities are generated in surplus or whether you're just consuming resources. So if we receive $10 million of revenue, but we spend $10.5, well, we have a $500,000 deficit. So we've got an operating margin, negative deficit of 5% as well. Now, again, talking about these numbers, as I said on the previous slide, a deficit doesn't mean that the organization is in trouble. A deficit isn't necessarily bad. Like a board might decide to approve a deficit for that year or for two years if they're investing in technology, if they're investing in digital transformation or growth or their people and other things as well. So what needs to get your attention as a board director is not the actual number, whether it's positive or negative, but asking actually, is it a return deficit? Is there a credible plan to actually fund or even reverse the deficit in the future? Because if in normal operations you're losing money year after year, eventually something has to change from that perspective as well. The second one that we've got up here is the current ratio. And in Archell, this really compares your current assets with your current liabilities and gives you an indication of your short-term financial capacity. So if we're looking within Australia, for example, we're governed by a double ASB. And under their definitions, the current asset is something which is an asset which is expected to be realized or consumed within next 12 months or through the course of ordinary operations, or is also unrestricted cash from that perspective as well. So if we if we bear that in mind when we're looking at the current ratio, if your current assets are $2 million and you've got current liabilities of a million dollars, you've got a current ratio of two. And like I said, people often ask me, what should our current ratio be? What how do we benchmark it against other people in the market, against our competitors, against industry? And what I keep saying is actually don't be too focused on any form of universal benchmark. Really look at where the ratio is currently, how it's moved in the past, where it's deteriorating, and what sits behind the number. Because if you think about a number, you think about a current ratio, you might have two organizations. Both have the same current ratio. Both have a current ratio of, say, one and a half. But they could be very different in terms of their risk profile. One might hold all its current assets in cash, but the other might hold them all in overdue receivables. Yet they've both got the same current ratio from that perspective. But their risk profile and their liquidity liquidity positions can be quite different from that perspective. So again, it's not about the numbers. We really need to be drilling down into actually why is it, why is the current ratio at that amount, what makes that up, and what's the forecast for the future as well. And what does that mean for our risk and our strategy as well? So that leads us quite nicely into the third ratio, which is the cash runway. And for me, I really like this one because it's quite tangible. Like it really translates cash into time as a tangible resource itself. So say we've got $900,000 in unrestricted cash, but we spend $300,000 a month. That gives you three months of cash runway. And again, a common question I always get from boards when I'm working with them is is three months enough? Should we be six months? Should we have six nine months? Should we have 12 months? What do we need to have? And again, I say to them, it depends. Have a look at your risk appetite, have a look at your strategy, have a look at your books. Because you might be an organization very, very reliable, very, very predictable government funding that that continues every single month. And you might be comfortable then to have a shorter runway. But if you're an organization with the same cash flow runway as that organization, but it's all made up of fundraising that comes in every single month, so can fluctuate, you're gonna have a very, very different risk profile and comfort with a three-month cash flow runway from that perspective as well. So it really depends on the organization from that perspective as well. And that leads us into our final ratio, which is funding concentration. Um and this really is a financial risk measure. So, see, imagine, for example, that 65% of your organization's income comes from one single government contract. Um, yes, you might be a highly profitable organization, your cash balance might be really healthy, and you might have a really strong balance sheet. But what happens if that contract is reduced? What happens if that contract is retendered, the government changes, the government's policy position actually changes, and you lose that 65% share of your income itself? It can be quite concerning and scary. Um and that and that doesn't mean that 65%, that 65% number is automatically scary and unacceptable. You may be comfortable with it as a board, and you might may be comfortable with having that dependency, but it really depends on your risk appetite. It really depends on your strategy. It really depends on how it's managed from that perspective. Um so if we're looking across each of these four, what I'd say is don't look at each of these ratios in isolation. They're not warning lights on their own, they're not pass or fail tests. They need to be looked in concert across all of them because there's no one specific ratio that applies or benchmark that applies to all these. It really depends on the context of your organization itself.
SPEAKER_01So, Roger, again. Words of wisdom on this one? Yeah, just adding that. I think ratios are incredibly under underutilized, uh, particularly in in organizations that maybe don't have as much financial expertise sitting around their board table or around their finance and audit. A ratio is simply a statement of relationships. You know, what is the relationship between surplus and deficit? And one of the things that good boards really do well is that they have these as ongoing conversations. It's not just, you know, we have a we have a current ratio of 1.2, which means that we've got 20% more than what we actually need, right? Um what it should be is actually a conversation about what is the ratio's lowest limit that we're comfortable with. And then the most important part is what is the ratio's highest limit that we're comfortable with? So, for example, you you take liquidity ratio. Everyone on this call uh heard about liquidity and the liquidity ratio. How much money have we got if it hits the fan? Is the definition of a liquidity ratio. So what would be uh a ratio that we'd be very uncomfortable with because we're running too close to the wind? Now, the next logical question is what would be the high end of that ratio? And people have said to me, oh, well, there shouldn't be a high end. Yeah, the more we have, the better. And the and the question there is, now hang on a second. If you've got a very high ratio, the formal definition of that is a lazy balance sheet. You're not actually using stuff on behalf of members, you're not using the the surplus and the um uh the retained earnings that you've got on behalf of your communities. It's sitting there lazy. It's not being used. So, what's that upper end as well? So the best way to get directors financially literate is to have conversations about what is yucky, what don't we want to have happen, and then what on the other end is too much. And it's that conversation that you can have that all of a sudden makes finance become a living, breathing thing rather than just a set of numbers. Back to you, Roger.
SPEAKER_04Some great insights there, Stephen. I really like that approach to creating that band in terms of the upper bound and lower bound when it comes to those ratios. What I really like to see when I'm looking at dashboards is actually a graph showing the ratio moving over time and then having those bands around the upper and lower limit. So you can actually see is it sitting within the band? Has it trended above the band or has it trended below the band? Because I really like to see the ongoing progress with this. And what I always tell board directors to do when it comes to those ratios is just ask some questions around actually, what's causing this changing ratio? We really, as a board, we need to know what's caused this. We don't just care about the number, we know we want to know about what led to this. The other key thing for board directors is to actually think about themselves, not always a question for management, but to think about internally as a board, well, at what point does the board actually need to act? So, yes, you might have an upper bound of 1.4, but if you're getting to 1.2, you as a board might want to start intervening and taking further action as well. So I think a really critical thing for a board is to understand what are those trigger points where intervention is required or escalation is required, and what does that intervention or escalation actually need to look like as well? Because therefore you're getting prior warning before a crisis actually interven hits from that perspective as well. Um so that's it in terms of I guess the fundamentals and the scene setting to bring us up to speed. So let's now start with some of the case studies. So let's move on to the next slide, please, Sean. So for this one, if we're looking up on screen, um, so we can see for this particular case study, we've got revenue which was 4.6 million last year. So the budget for this year was $5 million, and the latest forecast was for $5.4 million. So as we can see with those figures up on screen, revenue is not only up on last year, it's also $400,000 ahead of budget. So management is looking at these numbers, and they're using that as a bit of a growth story to ask the board to approve six more permanent employees. So the board has a bit of a decision to make about well, can the organization afford to turn this growth or growth from management's perspective into a larger permanent cost space? So I might pause there for a moment so you all can digest some of the numbers on the facts on the screen for a bit before I get stuck into the other bits. So the first question that we have here is well, revenue is $400,000 above budget. So the question is, is the organization performing better or worse than budget? Um, and remind reminding you that when we're looking at the budget, it's not just the revenue side of things from that perspective as well. So there are some subtle nuances. But I think what we're really trying to draw out here is it's not just about looking at those numbers in isolation, it's actually about the meaning that sits behind them. Because, yes, if we're looking in pure revenue terms, the revenue line is better than budget. It's $400,000 about above budget, but potentially the financial result is not better than budget from that perspective as well. Because as we can see up on screen, the organization expected to earn $5 million in revenue and produce a $350,000 surplus, but it now expects to earn $5.4 million of revenue and only produce a $50,000 surplus. So that means that that extra $400,000 of revenue has not really translated into a stronger bottom line. In fact, you could almost say the margin has actually disappeared by bringing on board that revenue. So the board doesn't necessarily have to see this as a warning signal, but it's also not an automatic measure of success from that perspective. So I think there's there's more questions that the board really needs to ask because the board really needs to understand whether this is going to be a temporary investment phase, and that's why there's been a reduction in that in that margin on the profit line, or is it just an indication that the organization's operating model is actually becoming weaker as it grows, and it's not really structurally sound from that perspective. So again, if we're just looking at the sheer numbers, it's it's hard to answer that question. Is it good or bad? Should we invest more in our staff or not? There needs to be more questions that actually accrue and need to be asked of the management from that perspective as well.
SPEAKER_01One of the things that might be useful also for people to know is how um when you're looking at your financial statements, if you so if you can visualize your profit and loss or your income statement, for example, it has it has there exactly as he's got on the screen. So here are the dollars, here's the actual, here's the budget, here's what we think it's going to be. Then obviously, and all of it you'd have the reasons for the variance. Um the variance and the reasons for the variance. Now, there's two things I would say about reasons for variance. Do not put it on a separate page, separate from the actual figures. Because then you've got to look at number, little number one, and then you've got to flip over a few pages and see what the variances work. What you what really worked is to have the reasons for the variance in bold. These are where you want the director's eyes to go to, not to the figures, but to the reasons for the variance. What has changed between what we thought should happen versus what actually did happen. And their focus should be on what those reasons are and exploring. Now, the second most important part is to have at the bottom of your PL a heading that says strategic implications for board discussion. And then whoever's written that report can have first crack at here are the one or two strategic implications. So in this example that Roger's showing, are we the strategic implication is are we willing to reduce our margin by having more staff on? And is and the next implication might be have we got a plan for bringing that margin back up again? What would that look like? So in any profit and loss statement, the two most important parts from a director's viewpoint are the reasons for the variance, and you've just got to be careful that you don't put down timing, timing, timing, timing. Yeah, that's a red flag if all of you ever see is a timing. The reason for it is timing. We want to know what are the drivers of the business. Um, what's what's making this change here? And then the other thing is directors should be asking questions. Most directors don't know how to ask good questions. Many do, but most don't. So help them. Give them some of those questions. Have that heading, strategic implications for board discussion. And maybe there might be some questions that you put in there for them to consider. Not questions that you know the answer to, but questions that will raise that level of curiosity to get them to explore the future implications of this. Okay, Roger, back to you.
SPEAKER_04Thanks, Steve. Thanks for that, Steve. I think one thing that I always say is the art of being a good director is knowing how to ask good questions. And I think that's really at the heart of it. Like you as directors, you need to be curious, but you need to be asking the right questions at that strategic level. And that's that's what some of this is trying to get us to do in terms of interrogating those numbers and coming back with those strategic implications from that perspective as well. So thank you for that, Steve. Um, Sean, let's move, let's probably move two slides ahead, actually, to the next one. Yes. Um, so if we look at this one, again, it's a similar case study to the one that we just saw. But for this one, the organization has a revenue of $3.2 million and it's got expenses of three million dollars. Um so therefore that means you've got a surplus of $200K. Um so management's commentary for this is rather brief, but it says the finance report describes your performance as relatively strong. So I'm just gonna pause there for a little bit if you can digest some of those numbers. So the question that we have here is what is the single most important question that these three reports raise? Now, there's probably 10 different questions that these three reports raise, but what what what's probably the key one that comes to mind for me? Um, if I'm trying to find that that the biggest red flag from that perspective? And I think the biggest thing for me is, well, why hasn't the surplus that we see converted into cash? Um, and does that then create the potential liquidity risk for the organization? Because if we're thinking about our fiduciary duties as a director, if we're thinking about your duty to not trade whilst in solvents and your your ability to have sustainable income streams, revenue, and operate as an organization, this is probably the critical one from that perspective. Um, so as we can see with this, and as we saw when we started to go through some of the fundamentals on the first slide, yes, an organization may have earned more income than it incurred in spenses under those accounting rules. But again, as we spoke about when we're coming talking about cash accounting versus accrual accounting, we can see that the cash flow statement starts to tell a very different story based on what we can see up on screen as well. So we can actually see that operating cash flow is actually negative 180,000. Um, and that cash has actually fallen by 300,000 over that period. So it means that the organization's performance can't just be assessed by looking purely at the profit and loss statement, which only talks about the income and the expenses itself. The balance sheet movement gives a bit more colour of movement around the lifeless nation. And if you're looking at the balance sheet coupled with the cash flow statement and the income and expenses statement, you can actually see that under the balance sheet, receivables have actually increased as well. They've risen by just under 400,000 from that perspective. So what this actually means, I guess, in more tangible terms, is yes, the organization has recorded income, but it hasn't yet been collected. Um again, it's not good or bad, it depends on the nuance. Like it could just be a timing issue, but it could also be a collectability issue if they're likely to become quite significant debtors from that perspective as well. Um, and depending on what the cause of this difference is, it's gonna lead to very different governance implications and governance actions from that perspective as well. Because if those accounts receivable are from a very reliable funder, which might be your state or federal government, for example, and they're due next week or tomorrow, the board might actually be quite comfortable with having that high level of accounts receivable. But at the same time, if they're disputed and from quite a risky counterparty, the risk can then actually be more serious. So that's another thing to bear bear in mind from that perspective as well. Um, because I think if you're spending that $120,000 buying a long-term asset, the cash leaves the bank immediately. But that's actually spread over the PL, over the asset's useful life when it's depreciated as well. So that's why this needs to be looked at at in conjunction um with the PL as well. And that's why the surplus cash and the surplus and the cash, their movements can move in opposite directions sometimes. And that's why I keep saying look at the balance sheet with the cash flow statement and the PL together, not just in isolation from that perspective as well.
SPEAKER_01Roger, if I can add to that one too, one of the things that I would really strongly suggest is to have a good look at your financial reports that are coming through to you. And if they don't have included the insights and wisdom from those who are writing the reports, then you need to consider either inviting them to provide their insights and wisdom rather than just presenting uh just presenting technically correct reports. But what the report should be doing is providing the focus for the directors through the initial wisdom and analysis of what it means for us. So don't just tell me this is our PL and it's passed through and it meets the accounting standards. That's technically correct and information useless to me as a director. I want to know, and so what? What do we need to be looking at in six months or 12 months or two years' time? What are the implications of this for us? And that shouldn't be left to a verbal report from the treasurer. It should actually be there as a starting of a conversation, a paper for discussion, possibly, about the implications of what this might mean. Too often I see financial reports that include the PL, the balance sheet, if you're lucky, a three-month rolling cash flow. But nowhere is there that says these are the two important items for us to discuss as a board that come from those reports. And if you just do that, it will fundamentally change financial reporting from being technically correct to something that's providing insight that the board then can, through its collective wisdom and different points of view, look at what implications this might have for the future. So please, a a plea from someone who's seen hundreds and hundreds of these reports, focus more on the wisdom and the so what and the implications for the future rather than just presenting a report. Roger.
SPEAKER_04Great point there, Steve. And I think the other thing that I always tell a lot of board report writers is actually actually put your put the hat on of someone actually reading this report. Because someone writing the report might have different things that they want to get out to the person who actually wants to read the report. If if you're wearing your director hat as a report writer, you always need to be thinking actually, what are the risk implications of this? What are the strategic implications of this? So if you think about your strategic plan as an organization, you're going to have particular strategic pillars. You might have four or five different strategic pillars. Every board report that comes out, I want to know which of these strategic pillars does it actually relate to and what are the strategic implications. At the same time, you can't look at strategy in Isolation of risk, which relates back to your risk appetite. I also want to know if I'm reading your board report as a director, how does this affect risk? How does it relate back to my risk appetite? Is what I'm seeing in the board paper negatively impacting on risk, or is it positively impacting on risk? Or what does it mean for me as a director? So when you're looking at that kind of so what, always have that risk lens, but at the same time, always have the strategy lenses as well there. And I think it's it's one thing as a director to have that in your mind when you're reading the paper, but it needs to work the other direction where the paper writer themselves, the executive themselves, needs to have in mind what are the strategic implications, what are the risk implications, what does that mean for a board director? Not just what I want to tell them, but what they actually want to hear from that perspective as well.
SPEAKER_05Um Sean, let's now skip to slide not slide 18. So we've been through a couple of case studies now.
SPEAKER_04Um but what I really wanted to finish with was just bringing together all the words of wisdom that we've heard from Steve combined with what we've actually seen on screen today. And I think if you remember nothing else from today's session, which I hope is not true, I want you to have a look at these four questions up on screen and and really remember them. Um and as Sean was saying, I think copies of this are going to be provided after, so don't feel like you need to take down notes now. But these are the four key questions that I really want you to take away. So the first of these is actually what's changed? So again, not everyone in the room is an accountant, and not everyone in the room is going to be an accountant. So don't try to necessarily understand every single number in the finance report. Look for the movement itself. Like what's different from budget? What's different from forecast? What's different from last month? What's different from last quarter? What's different from last year? Cash might have fallen, staff costs might have risen, receivables might have increased, the forecast might have moved from surplus to deficit, whatever that movement is, you need to know what it is. The other thing to bear in mind is that with this movement is to put it in perspective because the biggest variance is not always the most scary variance. The biggest variance is not always the most important one that the board needs to be concerned about. You really need to be looking for variances that are uh large or they're persistent or they're unexpected, or they have that ability to affect your risk profile and your strategy itself, which may not always be the biggest risk, the biggest variance from that perspective as well. The second critical question is well, that so what? Why does it matter? Um and I think I put this second, but it's probably the most important question for me, which is that so what piece. Because this is where we really move from accounting to governance. Like if your service is say $200,000 over budget, you don't need to know as a board which individual line items cause that particular nature to be over budgeted. You need to know actually what does this mean? Like, are they temporarily over budgeted as a service or are they structurally underfunded? Can you sustain that as an organization? So really always putting those numbers in context because that $200,000 deficit might actually be good. It might actually be manageable in an organization with very substantial reserves where they're trying to invest as well. But it could also be hugely concerning for a smaller organization with a much lower cash flow run rate and other things as well. So that brings us to that the next question, which is what assumptions matter most? Um and like as I said before, business cases, budgets, business models, forecasts, they're all built on assumptions. We don't have a crystal ball for everything that we write, everything that we forecast and model, that's all built on assumptions. So the crucial question here for board directors is well, which assumption is doing the heavy lifting? Which assumption here is doing the most work? And perhaps you've got a forecast that depends on a major government contract being renewed. What happens if it's not renewed? If this forecast depends on, I don't know, um, CPI sitting at 2%? What happens if CPI turns up at 6%? So what what assumption here is doing the heavy lifting? And then related to that, well, what if that assumption is actually wrong? What does that actually mean? What does that actually entail that we as an organization or the board need to be doing or thinking about it, acting on as well? Um and I think the the key thing about these assumptions is to actually understand, well, how fragile is that plan that management has put to you? How much can actually go wrong? Um, when does the board need to know about this? How much warning does the board need? And what is the board expected to do when you start to get to some of those triggers as well? Which then leads into that fourth question, which is well, what should the board do? And sometimes actually the answer might be just nothing. That might be the best answer out of that because management might be actually already responding appropriately and they don't need the board to intervene. They probably just need the board to just monitor the progress and the rollout. But there might be other times where the board actually needs to approve, to reject, to see more information, to see guidance, or actually impose conditions. But it it depends, it's that weighing up equation as well. And often I actually find that one of the best responses to this what should the board do question can actually be just a trigger. Um what I mean by that is well, if if if you've got a major contract and the assumption is that major contract is going to get renewed in the next 60 days, if it hasn't been renewed in 30 days' time or 45 days time, the management will then have to return to the board with some kind of contingency plan. So I really like boards to set out triggers for management. So management has a clear understanding of when things need to go up to the board again, for what reasons, what information is required, or what decision is required from the board's perspective as well. Because if you've got strong triggers, if the board has made it very clear to management what those triggers are, it allows management to manage while being clear when the issue actually needs to come back to the board from that perspective as well. Because that that's really what financial governance is. It's it's understanding that remit between the board and management and governing in light of that as well. So again, when when your next board pack arrives, your committee papers arrive, think about these four questions. Think about these four questions and what that means for you as an individual. And if you don't have those answers, ask them at the boardroom level. Ask them as management to actually give you the answers that you need because you can't equip your due diligence as a director unless you've got the answers to these questions from that perspective as well.
SPEAKER_01If I can add to that, the biggest barrier for any of our boards to actually understand the financials is nothing to do with the figures. It's to do with how they respond to questioning, how they actually ask the questions, how they uh drill deeper. You may have come across boards that you've either heard of or sat on where the uh modus operandi was to go on the attack. Why haven't you done this? Why is this wrong? Why what haven't you done? What have you missed out here? And it's that notion of um you're at fault and what are you hiding from us, as opposed to so what have we missed here? What are the risks that are emerging that we haven't looked at yet? What are the assumptions that didn't quite work out? If the board has the DNA of going on the attack and looking for fault, then you will have information hidden from you, whether overtly or covertly. If you as a board look at respectful dissent as a technique and as a as a tool that we can use, if you have a look at how we as a board actually challenge, respectfully challenge, then you will get information coming to you that in other boards it would never surface because the staff would be too afraid of the attacks that occur. And I see this happening time and time again. So have a look at the culture that you're putting in place so that you and the executive can actually work together to see what these things mean for us rather than trying to lay blame. Roger.
SPEAKER_04Spot on Steve. And I think that comes back to that old adage of culture eats strategy for breakfast. Um, and I think if if I look at this with uh almost a bit more of a pragmatic lens and you look at the counterside. So having been a chair, having had been a CEO and set on both sides of the equation, if you're feeling respected, if you're feeling safe, you're willing to admit when you've made a mistake. You're willing to admit when a risk has arisen that you actually hadn't catered for. You're willing to admit when something has gone pear-shaped, when an implementation should have got, should have gone right, but it went wrong. If the board is going to be punishing you each time you raise these, as Steve was saying, you're not going to raise these. And then as a board, you're not getting all the red flags. You're not able to make informed decisions because you're not getting the information from management. But it's not management's fault. It's your fault because you've started that culture within management from that perspective. So I think management needs to feel comfortable that they can admit the unknown. And I think often what I say to management is don't be fearful of saying I don't know. The board might ask you a question. There's nothing wrong with saying I don't know. There's nothing wrong with admitting that and seeking some further clarification. Um, and unless you have that healthy culture, unless you've got that respectful culture, ability to have those courageous conversations, sometimes you feel pressured to actually say and make up an answer or hide your mistakes as well, which is even worse for the board from the risk perspective as well. So spot on there, Steve. Thank you. Back to you, Sean.
SPEAKER_02Thank you, sir. So, everybody, please feel free to connect with our presenters today, Roger and Stephen on LinkedIn. I'm sure they'll really look forward to your connection. And if you'd uh like to be put in touch with either of them, their details are on screen there, obviously. Now, we've got something exciting coming to you in October and November. Um, that is for our Kiwi and Aussie listeners, that is. So we're introducing our governing with impact roadshow. It's a full day exploring what good governance looks like in the new AI world. With keynotes from leading subject matter experts and governance and AI, a TEDx style QA that really won't hold back at all. And there's plenty, it'll be there'll be plenty of great conversation and after function networking uh drinks to close things out. We'd love to see you all there. Early bird tickets are available, uh, saving you 35% off the ticket price. So just use the code EarlyBird at checkout. The URL is at the bottom of the slide there that you will see. If you can't read that, it's you'll find it on the homepage of the Board Pro website. Uh, if you're looking for past webinars from Board Pro to hone your knowledge, then you'll find our library of webinars, hundreds of them in our community and portal. And we invite you to join and be a part of this growing governance community. Only here will you find the detail of the webinars, including the slide decks, the transcripts, and the resources. Uh, follow the links on the screen to join. Uh, the community is free for everybody to join. So you'll receive an email, I think, from the team at Community Directors Australia tomorrow, which will include a copy of the uh recording and the slides and transcript, I believe. Uh that'll also be hosted on the community portal, the governance community portal for Board Pro in the next 48 hours. So thank you again for attending everybody. I hope you enjoyed the session today with Stephen and Roger. Um thank you for Community Directors Australia for hosting us today. I look forward to seeing you all at our next webinar event. Everybody, have a great day. Now, uh I think I'm uh handing over to Lochman if he's still with us.
SPEAKER_03Yeah, still here, Sean. Thank you so much for for that. And thank you, everyone, for joining us and being so active in the chat. Um, I think that if you look now, it is just message after message thanking our speakers today. So I'll thank them as well. Thanks to Roger uh for a brilliant presentation and Stephen for adding the expertise throughout. Uh to Sean and the team at Board Pro, thank you so much for helping us organize this session and for also providing us with these incredible speakers. Uh and I have to thank Beyond Bank as well for their support of this week. Um, as Sean said, we'll be sending the slides and the recording. Uh, hopefully later this afternoon, we'll get them to you. Uh, included in those slides will be all the links throughout that Sean has mentioned, as well as a link to the competition that was mentioned at the beginning of the session. Uh, so thanks again for joining us, and I hope to see you at one of the other sessions taking place this week. Thanks. Bye. Thanks a lot.