What Every Executive Needs to Know About Financial Reports
Financial information is the foundation for excellent planning systems.
In just about every business, information is a key factor to success. Information needs to be accurate, available and timely. Imagine for a minute you are a fashion designer. Wouldn’t it be useful to know that the hot color for spring is purple before you cut, sew and ship your whole collection of green and yellow shirts? The same holds true for any business. One of the most important pieces of information needed, regardless of whether you are a manufacturer or service company, is financial information about your company. Accurate and timely financial reports allow you to make accurate forecasts, plan ahead and make adjustments quickly. They allow you to confidently approach customers, vendors and investors with proposals that will make your business better. Internal improvements will also come easier and accelerate in number.
Financial results are a decaying asset
Financial results have a “best before” date. This means your current financials are only valuable to management for a very short period of time. After that, attention is diverted to the following month’s business and other matters. With a short shelf life, the usefulness of financial reports declines rapidly. In fact, the real value in current financials is how well the information can be used to improve the future of the business. Stale financials drive business managers to other less reliable or incomplete sources and, ultimately, more expensive and poorer decisions.
Financial Statements play a key role in the planning process
In addition to being the scorecard to help managers understand how past decisions impact performance, the financial statements are equally valuable in establishing the starting point in planning for the future. Imagine if the directions on your GPS never gave you the right coordinates for you current location. You would find it impossible to reach your destination. Your financial statements give you the starting coordinates for your planning process. If they are incorrect or untimely you are missing a valuable instrument in your company’s arsenal of business planning tools.
The rule of three
Three financial reports crucial to all businesses are the Income Statement, Balance Sheet and Cash Flow Statement. Often companies focus on only one, the Income Statement. But each of these reports tells a different story about the company and all three need to be accessible to decision makers in a timely manner. The employees creating these reports must be trained to make them accurate, timely and readily available. The executives in the business must learn how apply the information in the financial reports to their responsibility area; in particular:
- to monitor performance
- develop tactics to alter a faulty plan, and
- cultivate strategic initiatives to profitably grow the business
If financial reports and the precious information they contain are not delivered quickly and accurately, people will ignore them. If they are ignored, they become unimportant. If they are unimportant it stands to reason the departments within a company generating this information are equally unimportant. Conversely, with accurate numbers available quickly, the accounting and finance departments become integral parts of the organization; providing the foundational information the company needs to thrive and grow.
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