Financial Fluency: Why It Matters for Directors

We all accept that learning to speak and understand a new leanguage is a process that takes time, practice, and effort. Yet, many people lament that they "should" understand their financial statements even though they have not been taught the language of accounting. 

Accural accounting may not appear at first glance to be intuitive, but once you become fluent in this language, it communicates incredibly valuable insights on a business. Clearly, the major benefit of understanding accounting is that it allows you to interpret the financial performance of the business. But as you become more fluent, you will also uncover information on its business model, strategy, governance, and risk. 

Learning the Language of Accounting

The first step in learning the language of accounting is to gain an understanding of three very important financial statements: 

• Profit and Loss Account (Income Statement)
• Balance Sheet (Statement of Financial Position)
• Cash Flow Statement

However, the real benefit to a director comes from going further than reading each statement in isolation. All three financial statements provide a different view on the performance of the business. They tend to be taught as separate statements - and indeed they are - but they are linked in ways that are important and revelatory. 

Often, it is these links that give deeper insights on performance. Understanding how transactions flow from profit and loss account through to balance sheet and then on to cash flow (or not) takes a thorough understanding of accounting but provides insights you will not unearth by reading the statements individually. Mapping the relationships and dependencies between the three statements allows us to paint the most useful and complete picture of what is happening within the business. 

Beyond the Statements: The Power of Notes

Along with tracking transactions across the statements, another way to analyse the business more deeply is by taking information from outside the financial statements and using that in conjunction with the statements to judge performance. 

Notes to the accounts are a critical source of financial information, seldom taught or discussed in detail but nevertheless invaluable. Not only are the notes audited (giving them credibility as an information source), but they also contain information that, when combined with the figures in the statements, provide far more valuable insights on the business than the statements alone can. 

Why this Matters for Directors 

For directors and board members, financial literacy is not just about compliance - it is about governance and strategic decision-making. Understanding the relationship between financial statements and supplementary notes enables directors to: 

• Assess the organisation's financial health beyond headline figures. 
• Identify risks and opportunities embedded in the numbers. 
• Challenge assumptions and contribute meaningfully to boardroom discussions. 

Without these skills, boards risk making decisions based on incomplete or misunderstood data.

Take Your Knowledge Further

If you've already learned the language of finance and would like to become fluent, join us for our upcoming Advanced Finance for Experienced Directors workshop. 

Over the course of the training, we will take a deeper dive into key questions and considerations - not only for each of the financial statements individually, but also for what they tell us when they are linked together. This workshop is designed to help directors move beyond the basics and develop the confidence to interpret complex financial information in a governance context. 

This article is the view of the author(s) and does not necessarily reflect IoD Ireland’s policy or position.