Despite the fluid lexicon of business buzzwords, leaders of well-run enterprises understand fiscal responsibility, deliver competitive returns, and communicate with clarity and candor. In a recent Advisor, we detailed two timely and timeless insights about financial performance that ensure stewardship, especially in times of rapid technology-driven change. Here, we build on those insights by offering three additional perspectives on how financial fluency equips leaders to navigate complexity, align strategy with reality, and sustain long-term enterprise health.

Power of the Penny

Despite the old adage “a penny saved is a penny earned,” people often walk past pennies in parking lots, cafeterias, and just about every other place. We might think bending down to pick up a penny won’t change our lives, but the consequences are severe to our employers. For every million dollars of sales, 10% of the top line equals $100,000, and 1% equals $10,000 dollars. For large companies, for every billion dollars of sales, 1% equals 10 million dollars. One tenth of 1%, a sliver of copper, equals 1 million dollars to such a firm.

If the CFO of a $1 billion company learned of a consulting idea that would improve the business by “just” one tenth of 1% ($1 million), that executive would certainly know the value and consider paying a tidy sum for such guidance. On a smaller scale, an entrepreneur running a $5 million company can improve profits (and owner pay) by $50,000 with “just” a 1% improvement.

Leaders make numbers meaningful with clarity and simplicity. Doing so guides the workforce to understand why their jobs are important and recognize the big differences that small changes can make. Surprisingly, an extra penny can pay for a lot at most companies.

The penny concept also reinforces how hard it is to succeed in business. Even healthy, well-known businesses are challenged to generate 10% profits on sales. Stated in terms of time, 10% of the year is just over 36 days. Divide a company’s sales by 365. You will find that a tenth of a penny equates to about a third of a day, or approximately eight hours!

Relating time to money helps us look at things in a different way. Consider the value of each hour of work time. Think about what a meeting really costs, considering the approximate hourly rate of each attendee. Was the meeting time and money well spent? Would generative AI raise better questions and agentic AI more swiftly execute solutions?

The next time you see a penny on the ground, pick it up, and the next time you see a corporate penny hidden in plain view, guard that treasure — it is worth more than most of your colleagues ever considered.

Ratios Provide Perspective

Countless technical volumes are filled with encyclopedic lists of financial-statement ratios calculated by dividing a number into another, but the meaning of most ratios often gets lost. An easy way to assess the value of any key performance indicator is to ask the simple question, “What’s in the denominator?”

The denominator provides the context to scale the numerator. For example, sales revenue alone is meaningful, but divided by denominators, new insights emerge. Sales per employee, store, customer, transaction, hour, square footage, or assets yield different perspectives and actionable items that can improve the output (the numerator) by managing the denominator.

For example, “full service” movie theaters in recent years (pre-pandemic) moved from relying on occupancy (seats sold) to sales per seat, with dining as a new strategic offering. Innovators in technologies and medicine monitor the percentage of sales released in the last year, as new offerings often provide the highest price points and margins.

Focusing on the denominator creates perspective for comparing across time, companies, or industries. For example, managers can see liquidity reflected in the popular current ratio (current assets over current liabilities). Doing so illustrates how much of a company’s most liquid asset is soon committed to short-term obligations.

Such a calculation is similar to determining the level of comfort by comparing the balance in one’s checking and savings accounts to pending bills. There is no singular ratio that tells everything about a company, but using a workable set of meaningful indicators spotlights certain financial statement items for more attentive management.

Notably, the improvement or decline in ratio really depends on the difference in the growth rates of the selected numerator and denominators. Those differentials are even more meaningful when considering relative to the sales growth rate, discussed above.

Cash Flow Holds No Secrets

Cash flow is the lifeblood of an organization. Households, nonprofits, and publicly held companies all share one thing: over time, more cash must be received than is spent. Without sufficient cash to pay bills and no way to gain access to such cash, a company will quickly find itself out of business.

Accrual accounting, the most widely accepted corporate approach, matches revenues and expenses to time of transactions rather than when cash is exchanged (i.e. payment is often made in the month following service). Regardless of accounting methods, terminology, and timing, over time, cash flow reveals all about a company, just as review of the past few months of one’s debit or credit card statements will tell much about life.

Cash flow statements categorize the exchange of cash into three distinct activity sets: operating, investing, and financing. Operating cash flows are associated with a firm’s primary business activity. Net income differs from cash flows from operating activities, because the income statement recognizes revenues and expenses when earned or incurred, not when collected or paid.

Investing cash flows are related to the purchase and sale of a company’s non-current assets. When a company buys equipment to support its operations for one fiscal year, the cash spent is an investment in the future of the business. When the equipment is sold, the cash from the sale is considered investment cash inflows. Investments in financial securities (stocks and bonds) naturally fall into this category.

Financing cash flows are reported when companies raise or retire capital from creditors or shareholders. The receipt of cash from a bank loan or stock sales to owners are cash inflows. Conversely, dividend cash payments to shareholders or principal payments on loans are cash outflows.

Over time, successful businesses develop a pattern of generating sufficient cash from operations to purchase new assets, without continually requiring money from banks or owners. And what applies at the aggregate is certainly relevant at the project level, highlighting all managers’ responsibility to recognize that truly great business opportunities demonstrate positive cash flow — consistently and as soon as possible. Factoring cash flow into decisions distinguishes successful leaders. After all, wages, bills, and debt must be paid.

[For more from the author on this topic, see: “Dollars & Sense: 5 Timely & Timeless Digital Era Financial Insights.”]