The Importance of Fundamental Financial Knowledge in Leadership Roles

Recently, our organization appointed a new finance Director, a move that initially brought a sense of excitement due to her extensive credentials—a robust 20-year career in corporate finance, experience at a Big Four firm, and an MBA from a highly regarded institution. However, a series of exchanges over the past few weeks has left me and my colleagues both puzzled and concerned.

In our latest meeting, as I was guiding her through our monthly closing procedures, she posed a question that caught me completely off guard: why did we have to recognize depreciation as an expense each month when we weren’t actually spending any money? My initial reaction was disbelief; surely, she was testing my understanding of an essential Accounting principle.

I explained that depreciation is a method that allows us to allocate the cost of an asset over its useful life, ensuring that our financial records reflect the actual use of the asset in generating revenue. Despite my detailed explanation, she appeared bewildered, insisting, “But we already paid for the equipment. Why do we account for it again?”

In a bid to clarify further, I referenced Generally Accepted Accounting Principles (GAAP) and demonstrated the necessary journal entries. Her response was a request for a step-by-step walkthrough, remarking that this seemed overly complex. It was disheartening to realize that I was discussing concepts typically introduced during introductory Accounting courses.

As our conversation unfolded, she questioned why we couldn’t expense a new $50,000 server to secure a tax write-off for the current year instead of amortizing it over time. When I went over the importance of capitalization thresholds and the distinction between assets and expenses, she suggested we consult with our tax advisor, expressing her doubts about the validity of the practice.

To add to my astonishment, she is expected to review our financial statements for accuracy ahead of an upcoming board meeting. This situation raises significant concerns, especially given that we operate as a manufacturing company with a revenue of $15 million, not a small startup where one might expect a more relaxed approach towards formal accounting practices.

On top of this, she displayed confusion over why our cash flow statement did not align with the profit and loss statement. When I explained that net income does not equate to cash flow, her bewilderment deepened.

These experiences have led me to question how someone with two decades of experience in finance could lack an understanding of these fundamental principles. It begs the question: has she been in positions where she relied on