One of the great ironies of the Enron scandal of the early 2000s was that many of company’s money problems were plainly visible in their financial reporting—if you knew what to look for. While there was fraud at Enron, some of the worst trouble they got into was due to valid, but highly risky, transactions. The financial reporting was complete, but difficult to parse. For example, their remarkable earnings growth was due to an aggressive style of accounting called “mark to market,” where they could claim the market value of a transaction as revenue up front, even if there was no actual cash coming into Enron’s bank account.
Your business, which is hopefully not the next Enron, may also have issues hidden in its financial statements. A good goal, therefore, is to approach financial reporting with an eye toward revealing as much valuable business information as possible, not just the raw financial results. Getting the most out of your financial reporting means going deeper than the basics. It means integrating data from elsewhere to achieve useful insights into the condition of the business.
The superficial nature of financial reporting
There’s a tendency to treat financial reporting as a rote, periodic routine. Print the income statement, balance sheet and so forth and be done with it. Of course, it’s necessary to generate the core statements: Profit and Loss (P&L), balance sheet and statement of cash flows. You may also run reports like an accounts receivable aging and so forth.
The problem with basic financial reporting is that it tends to be superficial. It tells you the “what” of your business but generally not the “why.” Say your revenue is down compared to the same period a year earlier. That’s a fact. But, why is this happening? That’s what you should want to know. If you understand the root problem, you can solve it.
What do you really want to achieve?
A good practice is to approach financial reporting with a business strategy perspective. Ask, “What’s our business goal?” followed by, “How can our financial condition reveal what we’re doing right and what needs to be done better?” For example, let’s say cash flow is constraining your growth. You can do basic things to improve cash flow, like slowing down payables. Or, you could increase the sophistication of your financial reporting to discover new ways of getting more cash into the business.
How to get better at financial reporting
Getting the most out business data for cash flow will require merging the cash flow statement with other operational data. Accounting software that’s integrated with an Enterprise Resource Planning (ERP) solution can provide key data on factors that create a drag on cash flow. Creating a combined report, complete with data visualization, might reveal how customer payment terms or vendor payment schedules are taking cash out of the business at the wrong times. It would be essentially impossible to see this if you only had a basic cash flow statement to review.
This is a simple example. There are dozens of others. We’ve worked with many companies on this kind of project. We can help you get the most out your financial reporting.