A Great Way to Get Good Marks on Your Financial Statements

June 17, 2016 Don Mal

A KPMG study suggests reporting could be a lot better than it is – particularly if more firms look at operational KPIs.

We are getting to that time of year when kids are coming home with report cards, and smart parents know it’s not just the As and Bs that matter. It’s how teachers describe students’ performance with phrases like “shows progress” or “has mastered.”

What you don’t want to see is the phrase consulting firm KPMG used as the title of its recent assessment of the way finance department handle reporting: “Room For Improvement.”

The 32-page document is well worth reading in full, but the best parts get the heart of what’s probably causing a lot of internal pain within finance departments: whether or not to start factoring in non-financial KPIs into their reporting, and the pressure to provide short-term forecasts. As the authors note, there’s probably no such thing as a perfect short-term forecast that factors in everything that could happen around the world. They argue, however, that the effort is worth it:

“Carefully explained forecast information can play a deeper role. It can provide a ‘clean’ base from which investors can project performance. And it can act as a catalyst for a more forward-looking discussion of historical performance that connects with the forecast and its underlying assumptions. An alternative to providing forecast information is to align the presentation of historical information more closely with future performance.”

This is clearly not happening a lot today, based on KPMG’s numbers. For example, only 11% of those surveyed report on six key areas that the firm believes is key to financial health. Operational performance is one of those areas, and only 9% look at that over a historical period stretching back five years.

Perhaps worst of all, KPMG said only 14% of firms include reports or forecasts that go beyond financial statements and speak to strategy. This is where “room for improvement” gets real. It’s also where it might be helpful to think less like a large enterprise reporting to shareholders for a moment and more like a small business sitting down with their accountant.

For example, David Worrell wrote a book called The Entrepreneur’s Guide to Financial Statements, and as he recently wrote in a guest post for AllBusiness.com, a big area is simply making them readable.

“I’m willing to bet that at least one of your products or services is not profitable. Do you know which one it is?” he asked. “You spend a lot of time establishing a pricing strategy, but if your books aren’t organized so you can easily see your profitability by product line—and make sound pricing decisions—you may be losing money without even knowing it. (There are some good reasons for selling a product at a loss—you can probably name at least three—but you should do so knowingly.)”

Finance departments in large companies need to do something similar by making better use of the applications available to them to add not only more detail into their reporting, but guidance that looks beyond the numbers.

It may take a while before most CFOs and their teams get a positive report card on such work from the CEO or their shareholders, but now’s the time to earn an “A” for effort.

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