Navigating the Challenges of Financial Fundamentals in Leadership

Recently, our company welcomed a new finance Director, a move that initially inspired optimism given her impressive background of over 20 years in corporate finance, including experience with a Big Four firm and an MBA from a well-regarded institution. However, after just six weeks in her role, I find myself grappling with surprising gaps in her understanding of fundamental financial concepts.

As a senior accountant reporting directly to her, I took the opportunity to walk her through our monthly closing process. It was during this explanation that she posed a question that left me momentarily speechless: “Why do we waste money each month on depreciation expenses if we’re not actually spending anything?” At first, I thought she might be testing my knowledge, but her blank expression made it clear that she genuinely did not grasp the concept.

I took the time to elaborate on how depreciation allocates the cost of an asset over its useful life, providing a clearer picture of how we align expenses with the income generated from those assets. However, her response was a bewildered, “But we already paid for the equipment. Why are we expensing it again?” It became apparent that I was explaining principles that should be second nature for someone in her position.

When I attempted to dive deeper into Generally Accepted Accounting Principles (GAAP) and even showed her the relevant journal entries, she requested a step-by-step walkthrough, commenting that the process seemed “unnecessarily complicated.” A half-hour later, I was still navigating concepts that are typically introduced in basic Accounting courses.

The conversation took a further turn when she questioned our treatment of a new $50,000 server, suggesting we could simply expense it this year to maximize our tax write-off, rather than capitalizing it over time. My explanation of capitalization thresholds and the distinction between assets and expenses seemingly added to her confusion, prompting her to suggest, “Let’s check with the tax guy, because this doesn’t seem right.”

What is particularly concerning is that she is tasked with reviewing our financial statements for accuracy, with deadlines fast approaching for board presentations. The situation feels especially peculiar given that we operate a successful manufacturing business with $15 million in revenue — certainly not a small startup where one might expect some leeway in formal Accounting practices.

To add to my confusion, she expressed genuine bewilderment over why our cash flow statement does not align with the Profit and Loss (P&L) statement, struggling with the fundamental notion that net income and cash