Financial Reporting: What is Your Message?

Accounting reports record the financial performance Rising profits(Profit/Loss) and standing (Balance Sheet) of the company. They provide information to those interested in the financial score of the company and are used, if designed properly, to serve the interests of various audiences.

In order to effectively address the questions of each audience you need to understand their information needs.  You are, in fact, constructing a message targeted to the unique information needs of the audience. What is important to someone in operations is different from an investor, creditor or tax collector.

I find many businesses have adequate information in their accounting system but it may not be organized properly to be an effective report card of the business. Information is most likely consolidated and difficult to associate with key operations and lines of accountability in the company, products or other material events. To further complicate the effectiveness of the information it the timelines of the reporting due to poorly timed cutoff schedules and/or time consuming processes reconciling paperwork.

The following are the major audiences with interests in the financial score for product and service organizations.

The management team can benefit most from the financial scorekeeping. They are responsible for the day-to-day operation of the business and its ability to meet forecasted conditions.  Many decisions are based upon trends and history recorded in the financial reports as well as determining if the business is operating to plan.
Where discrepancies are noted lower level detail is then used to identify the reason for the variance.  Accurate information of business performance is also critical when unusual conditions occur and enable the management team to determine their ability to deal with them effectively.  This may be as simple as whether to take an order or not or to invest in new equipment where Return On Investment (ROI) is critical to the success of the business.
Other key financial factor monitored by accurate financial reports is the ability of the business to create and retain cash.  This is determined by when it is paying vendors, getting paid by customers, level of investment in inventory relative to revenue.
Investors may be owners and employees of the company or persons or institutions who purchased shares of stock in the company.  The interests of the investor are more along the lines of verifying the stability of the company and its ability to pay a dividend.Other questions might be:

  • Are there any indications that the ability of the company to pay a stream of income to shareholders is at risk?
  • Are there business operations or lines of business that are operating marginally that would jeopardize the bottom line if stronger lines of business were suffer a business downturn.
Many investors have a long-term interest in whether the company would be attractive as an acquisition by a larger company for a premium value.  Consequently the company’s performance will be measured against market leaders as a method of determining their potential return.
Creditors may consist of a variety of providers including vendors and banks.  Many creditors will not see your financial reports under normal circumstances. However, when cash flow is tight and you are relying upon a loan from a bank, or a relaxed payment schedule to a major creditor you may need to reveal them to establish confidence that their interests (loan amount or over due payments) are secure.
Creditors are different from investors in that they expect payment within a specified time period.  They have a current or immediate interest in the company’s financial standing and liquidity versus the longer-term return of investors or owners.  Creditors have an interest in the short-term liquidity of the company.  Creditors focus on how quickly the company can convert receivables and other assets (i.e. often inventory) into cash that can then be paid to them.
Tax Collectors
An important business liability is satisfying the tax authorities that have jurisdiction over your business.  This includes government agencies such as local municipalities (city/county), state and federal that tax companies as a function of sales, profits, property owned, payroll and impact on the environment.  In some cases (Washington Business & Occupation) taxes may be due independent upon whether or not the business is profitable.
Accurate accounting records are the basis upon which taxes are calculated and verified. Annual and quarterly tax filings should be performed by a professional experienced with the various tax authorities involved as they will periodically demand to see the company’s records to verify the correctness of the company’s tax payment.
Management will try to minimize the exposure (by executing tax avoidance strategies) to taxation and postpone payments as long as possible.  It is not unusual for companies to cross the line from avoiding to evading required taxes.  Responsible management will insure that the company operates a safe margin from evading taxes.
Profit is often the basis for taxation and consequently accounting reports are maintained to calculate profit consistent with tax regulations for the purpose of calculating the company’s tax liability.
Other Audiences
Other audiences such as customers and employees are interested in the general financial viability of the company.

  • Customers are interested in the company as a long-term source of supply.
  • Employees are interested in long-term employment with a company that will be able to reliably cover payroll, benefits generating an comfortable feeling of employment security.
  • Labor unions will evaluate the company’s position to afford increased demands in the labor contract.
  • Competing management will try to glean competitive advantages from the financial statements (more typical of public companies).
  • Government agencies will inspect financial records as a means of determining changes in regulations or imposing new regulations.

Your financial accounting reports tell a story to each audience that reviews them.  The owner of a private company may feel that this is not a critical matter as they may be classified for “internal use only.”.

Don’t get caught with reports that are not properly developed.  The need for the reports to report the right story can occur when you least expect it but your financial reporting system will be underdeveloped and the time to develop them properly will not be available putting you at a disadvantage. Every company, private or public, will benefit by attention to a consistent investment in how the financial reports score the company.

The big question is “Do your Financial/Management Reports tell a story that you are satisfied with.”  I am sure you will want the story to be favorable to the company’s interests. This will require forethought, strategic design and execution, delegated ownership of the data and regular attention to make sure the best message is provided to each audience.

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