How to make financials more meaningful
For many businesses, financial reports are a formality, but how often do key decision makers challenge the data to find out more about what it really means?
by Phil Wright | Director, Menzies LLP – Guest Contributor
Financial directors within small and medium-sized businesses often say that profit and loss reports prepared for the monthly Board meeting get little or no reaction. In some instances, this could be because the data is not being interpreted fully or accurately enough, or else it lacks the layer of interpretation needed to make it meaningful.
When smaller businesses grow, business leaders may find that the financial data being reported back by the in-house finance team is no longer as useful as it once was. For example, it may be too historical or focused in an area that is no longer relevant or necessary. In other cases, the data sets may have been added to over time, which has caused monthly management reports to become too long and difficult to navigate.
If a financial report has grown to 25 pages or more and is at best skim read, or at worst, ignored completely, it would probably benefit from a review. In general, reports tend to get more favourable feedback if they are much shorter, more relevant and focused on the future. How does the past impact the future? How can we use this information to spark positive change?
…reports tend to get more favourable feedback if they are much shorter, more relevant and focused on the future.
As business advisers, our teams are often asked for advice about how to improve financial reports and make them more user-friendly. We usually recommend that a management pack of information is prepared and circulated in advance of board meetings; making sure there is the right amount of analysis to ensure the data is understood. This should be accompanied by a ‘one pager’ summarising key data in an easy-to-digest format.
As part of its monthly reporting, the business should establish Key Performance Indicators (KPIs) and keep them under review as the business grows. Sales and cash flow forecasts should also be prepared to provide a realistic picture of where the business is heading. The management pack should share facts about the performance of the business against these pre-agreed KPIs – for example, are sales figures higher or lower than targeted? How might this affect the forecast for next month, the current year and the year after?
…the business should establish Key Performance Indicators (KPIs) and keep them under review as the business grows.
Keeping the data as up-to-date as possible is also important. Board directors are bound to lose interest if the only numbers they are being shown each month relate to the previous month’s performance. If this is happening, financial teams should try to find out why the information is late. For example, if the business is waiting until the 21st for all supplier invoices to come in and be entered meaningful financial reports arrive much later. Introducing a new rule whereby all supplier invoices must be in by the 7th of the month, to get paid by the end of the month, could make all the difference and improve your internal reporting timetable. Do you really need to wait that long?
Reporting financial data can be more complex in businesses that operate on a project basis, such as those in the construction industry. Some projects may last just a few months, whereas others might last a year or more, and it is important to account for them on a project-by-project basis. As well as keeping track of payments made and invoices issued, the business will want to know whether each individual piece of work is profitable or not. To calculate this accurately, the financial team will need to stay in touch with operations and make sure they know what stage the project has reached and whether it is likely to complete on time and on budget, and if not, due provision is made.
Depending on the number of projects underway at any one time, it may be important for the financial team to understand the point at which each is expected to turn cash positive. This could help to reassure decision makers that the cash position of the business is secure, even if the project appears to be unprofitable in the early stages. Conversely, a profitable contract still may put a huge cash flow strain on a business if early expenditure is significant, before recovering from your customer. If this occurred on multiple contracts, at the same time, clearly the impact is compounded.
…forecast modelling should be introduced to provide a view of how strategic decisions could impact the performance of the business over time.
To ensure financial data is relevant and forward-looking, forecast modelling should be introduced to provide a view of how strategic decisions could impact the performance of the business over time. For example, the Board may wish to know what would happen if the business increases or reduces prices by 1%, or if it recruits a new senior manager to head up an expanding sales function, or ventures to new territories. Demonstrating the cash impact of changes or differing scenarios should keep the whole management team engaged. This type of cash modelling can help to make financial data more meaningful and integral to the running of the business
Phil Wright is a Director with Menzies LLPMenzies LLP, Chartered Accountants and business advisers on the South Coast of England. www.menzies.co.uk/
This article was first published in the Financial Director https://www.financialdirector.co.uk/
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