Mart Nõmper, Sworn Auditor and Head of Audit and Assurance Services, and Mikk Mägi, Head of Financial Advisory at the pan-Baltic audit, outsourcing and advisory services provider Grant Thornton Baltic, spoke about what distinguishes a good financial manager from a mediocre one on the Äripäev Radio programme ‘Kasvukursil’.
“The difference between a good and a mediocre financial manager is best manifested during difficult times,” both men find. “If a financial manager is good at forecasting, it is done on an ongoing basis and the budgeting process is constant and systematic, then analysing various scenarios is also very easy. If budgeting is – in the worst case – done once a year in the spring of the ongoing year and is done simply for something to be approved, the situation is more complicated.”
According to Nõmper and Mägi, we shouldn’t forget that it must always be possible to monitor several scenarios. Every company should have multiple ‘what if…’ analyses or scenarios for what will happen if revenue drops due to the state of emergency or even stops for a certain period, if the number of clients decreases, if the number of staff has to be cut, etc. What will the company’s financial statements look like, say, in 12 months according to the positive and negative forecast? Good financial forecasting takes all of that into account and the decision making in managing the company is significantly more efficient.
The difference between a good and a mediocre financial manager is also evident in the preparation of annual reports: for example, what to do when the forecast indicates that the special conditions and covenants agreed with the bank cannot be fulfilled? A good financial manager knows that one option is changing the accounting principles – different accounting principles may give a different result in accounting, and making the right choice among these may mitigate the problem. The results of companies are, for example, largely influenced by whether lease contracts are recognised as a finance lease or operating lease. Upon recognition as operating lease, the company’s lease expense is higher and EBITDA is lower. In the case of recognition as finance lease, assets are on the balance sheet and are being depreciated – depreciation is excluded from EBITDA, and EBITDA is higher. Similarly, the level of EBITDA differs in a company depending on whether the government grants are recognised using the net or gross method.
If a company has experienced stable growth for years, it is understandable that the company often relies on just one scenario and the scenarios tend to show the size of the growth. In a time of uncertainty, decline and crisis, however, the value for preparing different scenarios has grown in the context of financial accounting and forecasting. No one forbids us from considering different scenarios also during the good times, as the preparation of different forecasts allows us to calculate a weighted average cash flow. Everything that concerns the value of a company’s assets has a significant impact on the success of the company and managing that success.
“If a company has strong financial management and forecasting in place then most problems can be foreseen, instead of discovering potential problems between Christmas and the New Year and then rushing to solve these problems,” Mägi and Nõmper attest. “A good financial manager knows how to prevent these unexpected situations. Fortunately, an increasing number of financial managers are realising that different financial scenarios are necessary.”