By Randy Kroll, Partner
A business owner and I were talking recently and I asked him how much time he spends with his company’s monthly financial statements. The answer was not much; he looks at only two numbers, the cash balance and the net income.
He’s not alone. There can be a tendency for business owners to do a quick scan and then to jump to cash and net income because either everything else in the financial statement is, well, boringly routine or the statements are not designed to tell a story. And this can cause major headaches down the road. In fact, those of us at Platinum Group who work on turnarounds have found over the years a direct correlation between the quality of a company’s financial reports and its strength as an ongoing concern. And with quality I mean compelling.
Those businesses that have not honed their financial statements to tell a compelling story tend to use them as a snapshot—shall we say a black and white photo. Nice to have and insert in one’s accounting photo album, but lacking in color and therefore, unlikely to attract attention or have a lasting effect.
To stay with the picture analogy, financial statements must reflect the colorful history of the business. The balance sheet reflects its history at a point in time, but it must also reflect the lighting and color to draw you into the story underlying the history. The income statement, on the other hand, is the “streaming” picture. Have you ever gotten to the end of a Netflix series show and speculated on what will happen during the next episode? An effective set of financial statements achieves the same sense of anticipation and helps you move towards the future.
To make your financial statements more colorful and compelling, add the following:
- A trailer. A bulleted executive summary that introduces your financial story.
- One-page statements. One-page balance sheet, one-page income statement, and one-page cash flow statement.
- Planning document: Three to five leading key performance indicators.
More detailed financial statements and analysis can follow to provide additional insights and planning materials. And to keep them compelling consider these additional strategies:
- Work with your accounting staff to redesign the structure of your accounting system to efficiently provide the financial information that is most meaningful to you and others who you want to engage with them.
- If the accounting system has limitations, look for a more robust accounting system, one that is designed to best fit the uniqueness of your industry.
- Consider hiring a fractional CFO to provide deeper support for planning and reporting.
- Remember that Platinum consultants have expertise and experience in financial analysis and statements, and we are here to help.