What You Should Expect out of Your Financial Reports
Don’t Settle For Less!
We come across business owners and managers who diligently study their financial reports soon after they are available. They sometimes challenge the data and presentation of the reports to make them more relevant. Some managers share (parts of) the reports internally for further analysis and action.
We also come across business owners who never view financial reports. Never. They may sign tax returns and take care of other regulatory issues but they see little or no merit in studying what relates to their past business performance. Some managers explain they are not skilled at reading financial reports so should focus on other tasks such as selling, hiring and general management.
And then there are owners / managers in between these extremes.
The quality and relevance of financial reporting is likely to influence a manager’s attitude to financial matters. The fact is a good understanding of finance is important and can greatly improve decision making. We believe all business owners / managers should expect to get AT LEAST the following from their financial reports:
Financials Tied to Business Strategy
If your business strategy involves revenue growth, ensure your financials tell you how much you are growing. If your strategy involves cost reduction, ensure you can quickly see whether you are cutting costs. The people who prepare the financial statements should be familiar with your strategy so they can ensure the strategic message is captured in all reports.
Incorporate Metrics or Key Performance Indicators (KPI’s)
The dashboard in your car summarizes important data even though there are thousands of other data points you could consider. Your financial statements should do the same; provide a few key metrics which describe business performance. You can then drill into areas that need attention.
Each business is different so it’s reasonable to expect that the ‘traditional’ Profit & Loss and Balance Sheet will not provide everything you need to make business decisions. Previously, it was hard to generate customized reports because data was difficult to access and manipulate. But that is seldom the case now with modern software and better business processes.
Timely Access to Statements
Sometimes businesses become obsessed with generating and viewing monthly statements soon after the month-end. But are these really required so soon? And do you need everything in those monthly reports or is it better to get a comprehensive set of quarterly reports so you can reflect on trends more easily? There’s no ‘rule’ but you should get what you need when you need it.
A Market or External View
Financial statements can be very inward looking meaning they only capture data on what your business has done or will do. But what about your competitors? Maybe, for example, your profits didn’t increase in the last quarter but your market share increased. Or maybe your revenue increased but the total market size has decreased impacting your long-term prospects. Your financial reports should at least trigger discussion on these ‘external’ influences.
This one is simple. Financial reports should indicate what the future looks like AND how the future will be influenced by changes you might make. Many forecasts (or ‘budgets’) capture expenses but don’t focus enough on sales forecasts.
All to often, we see businesses which seem healthy but will face challenges due to a shortage of cash. Your financial reports should highlight any associated risks.
Fortunately, most businesses will never experience instances of fraud but financial controls are important and management should be alerted to risks associated with fraud.