Understanding (January 2015)

The goal of financial statements is to tell the story of the business in numerical form. That story may be for the most recent month, quarter, year or longer. There will be a lot of numbers on the pages but the person delivering the information (CFO, Controller, CPA, accountant, bookkeeper, whoever) should help the readers (often members of management who do not have an accounting or finance background) understand the key issues and milestones that are an integral part of the financial statements.

They should also be willing to explain in as much detail as the customer (i.e., the person reading the financial statements) desires. Over time, the goal should be to help increase management’s understanding of how operating decisions impact the financial statements.

The other day, I asked a question about a set of financial statements and was presented with a 35 line journal entry with virtually no notes. I’ve obviously spent my career working the financial statements, projections, operating and strategic business issues so I was able to sort through it but even for me it took a bit of time and I had to go ask some people about the underlying events that caused parts of the journal entry. But what happens when this kind of information is presented to someone who skills lay elsewhere? To them, it’s indecipherable and that shouldn’t be the case.   The company books and records should lend clarity, not confusion.

As I write this, it is the end of January. It is a time of year when many are closing the books on 2014. You can’t change the past so there is nothing that can be done at this point to impact 2014 sales and operations. But having a clear perspective on the year is another matter.

Understanding the past is the key to improving the future. Through understanding comes the ability to improve and this applies not just to the operations of the business but to the financial reporting process as well. Both should be constantly, measurably improving.

If you’re on the accounting and finance side, make it your goal to clearly and concisely explain financial results to the management team. Don’t make the mistake of thinking they don’t need to understand.

If you’re a consumer of financial information, insist on explanations that make sense to you.   Don’t make the mistake of assuming that understanding financial statements is the domain of financial professionals. While preparing them might be their domain, understanding is everybody’s role.

Does your finance team help you understand?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]

The archive of these monthly newsletters is posted at the Resources section of homza.com

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